S&P 500 Primed for Rally as Fed Rate Cuts Loom—Analysts Flip Bullish

Wall Street's mood swings faster than a crypto chart—and this week, the pendulum's slammed into greed mode.

The Fed Effect

With Jerome Powell & Co. telegraphing rate cuts, analysts are piling into S&P 500 bets like degens into a low-float altcoin. Never mind that six months ago they were predicting recession—now it's all 'soft landing' narratives and price target upgrades.

Liquidity Tsunami

Market makers smell cheap money on the horizon. Traders are front-running the Fed like it's a Binance launchpad token—because nothing fuels equity rallies like the heroin of loose monetary policy.

The Catch

Remember: these are the same geniuses who missed 2022's crash. But hey, when the printing press starts humming, even broken clocks get rich twice a day.

Goldman analysts imply a 6.9K S&P 500 index level peak

The analysts raised the targeted 12-month S&P 500 index level from 6.5K to 6.9K, claiming that lower bond yields than previously projected and the willingness of investors to look through the weakness of short-term earnings were the Core reasons behind this revision.

The expected year-end level for the six-month index level also increased from 6.1K to 6.6K, while the three-month level ROSE from 5.9K to 6.4K. However, the analysts pointed out that they expected “near-term rotations” to the estimates “below the surface of the index” following what they referred to as a “narrow breadth rally.” 

The bank’s analysts also mentioned that the “median constituent” remained over 10% below its 52-week ATH, adding that they believed in a likelihood of a “catch up” rather than a “catch down.”

The market is expected to grow in the next couple of months as the analysts recommended investments at the beginning of the second half of the year. Particularly, they suggested a balanced allocation in several sectors, citing potential gains in Software & Services, Real Estate, Utilities, Materials, Media & Entertainment, and Alternative Asset Managers.

The forecasted “forward price-to-earnings ratio” for the S&P 500 also jumped to 22, up from 20.4.

Goldman strategists previously lifted the three-month index level target to 5.9K in May, saying that relaxing trade tensions between the U.S. and China favored the projection despite looming uncertainties. The upgrade, just like the recent one, followed a rally on Wall Street as U.S.-China negotiators agreed to a temporary tariff “ceasefire.”

Kostin’s team saw less than a 1% gain from levels at that time, implying that the advance on Wall Street is likely to stagnate.

Kostin says Fed rates are more crucial for stocks

In June, the U.S. equity strategist said that bond yield levels are not as critical for stocks as the factors affecting the Fed’s interest rates. The rise in interest rates affects stocks by reducing the earnings of companies and limiting the potential growth scope for stock valuations. However, they added that the vulnerability of stocks to increasing Fed rates also depends on some reasons for rising yields.

The team also pointed out that declining recession risk, U.S. government debt concerns, and high lending costs increased yields for U.S. bonds. The increase in yields on U.S. bonds was previously driven by reduced recession risk and declining tensions in international trade.

“Equities typically appreciate alongside rising bond yields when the market is raising its expectations for economic growth, but struggle when yields rise due to other drivers, like fiscal concerns.”

–David Kostin, Chief Strategist at Goldman Sachs 

Goldman’s strategists expected bond yields to remain unchanged in 2025, and the Fed to complete its cycle of rate cuts in June next year, with its policy rates ranging between 3.5% and 3.7%.

Kostin’s team claimed that although many investors are still not fully convinced, they pointed out that 5% nominal yields could be the tipping point for U.S. stocks.

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