Goldman’s Stagflationary Outlook: Revised S&P 500 Target and Rising Recession Risks

As the April 2 tariff deadline approaches, financial markets are bracing for further uncertainty. In a recent note, analysts from Goldman Sachs have painted a grim picture for the S&P 500, cutting their short-term target amid growing concerns over stagflation.

Market Context: Strain on Stock Index Futures

As Q1 comes to an end, stock-index futures are witnessing downward pressure, with the S&P 500 on track for its worst quarterly performance since Q2 2022. In light of current economic conditions, Goldman Sachs’ equity strategists, led by David Kostin, have revised the S&P 500 forecast downward from a flat outlook to an anticipated 5% drop, setting a target of approximately 5,300 points.

Long-term Projections Remain Relatively Positive

Despite the immediate pessimism, the bank maintains a relatively optimistic long-term outlook. They project that the S&P 500 will reach around 5,900 within the next 12 months, translating to a 6% increase; however, this is a significant reduction from their prior expectation of a 16% increase for the same timeframe. The downward revision seems closely tied to escalating fears regarding stagflation.

Impact of Tariffs on Inflation and Economic Growth

The Goldman Sachs economics team, led by Jan Hatzius, has raised its anticipated U.S. import tariffs from an increase of 10 percentage points to 15% in light of expected ‘reciprocal’ penalties. Higher tariffs are likely to elevate consumer prices, prompting the team to adjust their core PCE inflation forecast for year-end 2025 by 0.5 percentage points to 3.5%. Furthermore, their GDP growth forecast has been lowered by 0.5 percentage points to 1.0% on a year-over-year basis, reflecting a decline in first-quarter growth estimates to just 0.2%.

Rising Recession Risks

In addition to lowering growth projections, Goldman Sachs has increased the likelihood of a U.S. recession within the next 12 months from 20% to 35%. This revision is attributed to a weaker growth baseline, a marked decline in both household and business confidence, and comments from White House officials signaling a willingness to accept some near-term economic weakness in pursuit of broader policy goals.

Corporate Profits Under Pressure

The implications of these economic forecasts are dire for corporate profitability. Kostin and his team have slashed their earnings per share (EPS) growth target for 2025 from an optimistic 7% to a much more conservative 3%. EPS growth forecasts for 2026 have also been slightly reduced from 7% to 6%. Following previous EPS adjustments, Goldman has now set its S&P 500 EPS target for this year at $253, down from an earlier $262.

Valuation Changes Amidst Uncertainty

Given the current climate of uncertainty, Goldman Sachs believes that a higher equity risk premium is warranted, which would necessitate lower valuation multiples for stocks. As it stands, the S&P 500’s price-to-earnings (P/E) ratio has already decreased from around 21.5 at the beginning of the year to about 20. In light of their projections, the analysts anticipate this ratio could dip to 19x in three months, eventually rising modestly to 19.5x over 12 months.

Potential for a Market Downturn

With the market’s recent volatility, many investors might welcome a lesser drop of about 5% for the S&P 500 from its peak. However, should recession risks intensify, historical trends suggest that the sell-off could deepen considerably. Goldman notes that the S&P 500 has typically experienced a decline of roughly 25% from its previous peak during recessions. Based on the record high of 6,144 achieved in February, this could suggest a further 17% decline to a trough level of approximately 4,600 points.

Conclusion

In summary, Goldman’s recent revelations reflect a cautious stance as high tariff-induced inflation collides with stagnant growth projections. While the long-term outlook retains some optimism, the near-term economic environment raises significant concerns, warranting acute attention from investors navigating these turbulent waters.