Goldman Sachs slashes S&P 500 target as trade wars rock markets

Goldman Sachs has trimmed its S&P 500 target after lowering its economic growth forecast, with the top end of Wall Street not impervious to uncertainty over US trade policy.

Uncertainty over US trade policy triggered sell-offs on Wall Street this week, before a slight rebound on Wednesday (US time). Picture: Spencer Platt/Getty Images

Goldman Sachs trimmed its target for the S&P 500 after cutting its recent economic growth forecast, assuming a higher overall tariff rate in the US and allowing for a higher level of uncertainty typically associated with a greater equity risk premium.

From “Magnificent 7” to “Maleficent 7”, once-booming US tech giants including Apple, Alphabet, Amazon, Meta, Microsoft, Nvidia and Tesla collectively fell 14 per cent in just three weeks, accounting for about half of a sizeable 9 per cent drop in the S&P 500 from its record high, amid worries about US trade policy.

Despite expectations they will keep growing their earnings per share at a faster rate than the “S&P 493”, the group has derated to a 12-month forward PE ratio of 26x.

This fall in Mag 7 to its lowest valuation since early 2023 was caused by a “major unwind in positioning” in recent weeks, especially among hedge funds, according to Goldman Sachs.

“The proximate causes of the market decline are the jump in policy uncertainty largely related to tariffs, concerns about the economic growth outlook, and a positioning unwind, especially among hedge funds,” said Goldman Sachs chief US equity strategist David Kostin.

“We believe investors will require either a catalyst that improves the economic growth outlook or clear asymmetry to the upside before they try to ‘catch the falling knife’ and reverse the recent market momentum.”

Investors were slightly relieved on Thursday as US consumer price inflation fell more than expected in February.

However, the inflation fall was largely due to a fall in airfares and largely predates tariff hikes in the US.

US President Donald Trump has threatened to respond to retaliatory tariffs. Picture: Andrew Harnik/Getty Images

The S&P 500 trimmed more than half of its intraday rise and US Treasuries were unable to sustain a rally after the CPI data.

Meanwhile the trade war worsened as the EU retaliated to US steel and aluminium tariffs by imposing measures on goods worth some €26bn, and US President Donald Trump threatened to respond. Canada also retaliated with tariffs on US goods worth some $C30bn.

According to Mr Kostin, the current valuation of the US stock market, its implied expectations for economic growth, and investor positioning “all suggest the market is trading close to fair value”. But, his models reflect the fact “fair value has recently declined sharply”.

On Wednesday, Mr Kostin cut the bank’s 2025 end target for the US stock market to reflect the recently lowered economic growth forecast of its US economics team, a higher assumed tariff rate, and higher level of uncertainty — typically associated with a greater equity risk premium.

“We lower our 2025 year-end S&P 500 index target to 6200 from 6500 to reflect a 4 per cent reduction in our modelled fair-value forward PE multiple to 20.6x from 21.5x,” he said.

His new index target implies an 11 per cent price gain during the balance of the year, similar to his return estimate at the start of the year, but from a lower starting point.

Mr Kostin also trimmed his “top-down” 2025 EPS growth forecast to 7 per cent from 9 per cent, but maintained a 2026 growth estimate of 7 per cent. His new EPS estimates are $US262 and $US280 respectively, down from $US268 and $US288.

He said the current “rotation from cyclical to defensive industries within the US equity market” suggests stocks are currently pricing an economic growth rate slightly below the base-case forecast of economists, who cut their growth forecast on Monday.

Perhaps unsurprisingly, amid rapid-fire developments in US trade policy, he said economic growth data and policy announcements should be the “key drivers of these rotations going forward.”

It came after 25 per cent tariffs on US steel and aluminium imports took effect on Wednesday, without any exemptions.

It follows a 20 per cent increase in tariffs on US imports from China and 25 per cent tariffs on most goods from Mexico and Canada, albeit the latter tariffs have been partly delayed.

The outcome of a comprehensive review of US trade policy is due to be handed down to US President Donald Trump at the start of April.

So-called reciprocal tariffs — including a 25 per cent tariff on the EU — are due to start on April 2.

Mr Kostin said a recent sharp increase in the Economic Policy Uncertainty Index has prompted many fund managers to ask about the implications of a potential recession on the US equity market.

“Historically, the median peak-to-trough decline in S&P 500 earnings during 12 economic downturns since WWII equals 13 per cent,” he said.

“During recessions, the index level typically declines by 24 per cent from its peak.

“Outside of a recession, history shows that S&P 500 drawdowns are usually good buying opportunities if the economy and earnings continue to grow, which is our base-case scenario.”

His current recommendation, based on his base-case outlook, is for investors to own stocks insulated from the major drivers of what he expects to be “ongoing market volatility”.

These stocks should have the lowest recent share price sensitivity to the equity market’s pricing of US economic growth, trade policy risk, and artificial intelligence.

But, at least one of the following three developments were needed for the stockmarket to recover: an improvement in the outlook for US economic activity, either due to better growth data or a change in tariff policy; equity valuations would need to price in economic growth well below Goldman’s forecast, or; investor positioning would need to become “depressed”.

Originally published as Goldman Sachs slashes S&P 500 target as trade wars rock markets