Goldman Sachs Group Inc. has slashed its year-end target for the S&P 500 Index, arguing that a dramatic shift in the outlook for interest rates moving higher will weigh on valuations for US equities. The investment bank now sees the benchmark stock index finishing the year at 3,600, down from its previous forecast of 4,300.
The new forecast reflects Goldman’s view that bond yields are likely to rise faster than previously expected, led by a pickup in inflation. The increase in the rate forecasts driven by higher inflation expectations leaves equities less attractive relative to bonds.
Risks to the latest forecast
Because of the growing probability of recession, which would lower corporate profits and widen the yield gap, and a consequent decline in US equity prices to 3,150, the dangers to the latest prediction are still skewed toward a negative result. Jerome Powell, Fed Chairperson has suggested that he is willing to risk a recession in order to fight inflation, generating fears that central banks might unintentionally damage global economic growth.
Fed raises rates by the widely expected 75 basis points
The Federal Reserve increased interest rates by the widely anticipated 75 basis points, saying it expects its so-called terminal rate to reach 4.6% in order to combat high U.S. inflation, which is when the central bank will stop tightening. The central bank also said it intended to keep raising rates aggressively in order to achieve a 4.4 percent rate by next year through continuous interest rate hikes.
Advice for the Investors
The US bank, like many of its peers, recommends that investors take a defensive posture in the face of heightened uncertainty, and they should invest in companies with excellent quality characteristics such as strong balance sheets, high return on capital, and consistent sales growth. A number of market participants have adopted a more cautious stance in recent weeks amid concerns over the outlook for global growth. In such an environment, it makes sense to focus on companies that are less susceptible to an economic downturn.
One way to do this is to look for companies with strong balance sheets. These companies will be better positioned to weather any potential storms that might arise.
Another key metric to look at is the return on capital. This ratio measures how efficiently a company is using its capital, and companies with high returns on capital are usually more resilient during periods of economic stress.
Finally, another important metric to focus on is sales growth. Companies that are able to maintain stable sales growth in uncertain times are typically well-positioned to outperform their peers. While there is no surefire way to protect against all downside risk, owning stocks with these quality attributes can help mitigate some of the volatility that is currently being seen in the markets.