An above-trend growth and a soft landing are likely to occur on US equities. But stock valuations are on the balance since they will likely drop due to the rising interest rates. Goldman Sachs wrote on Monday that even if the stock market avoids a recession, earnings might not grow in 2023. The company's chief raised the S&P 500 price target for year-end from 3,600 to 4,000. He explained that the next Fed’s debt-ceiling discussion would likely become critical.
In any case, the S&P 500 now stands at about 4,111 after a substantial 7% year-to-date rally. It would be best to note that Goldman Sachs impacts numerous investors’ decisions. The chief reports that alternatives to US stocks like non-US cash, credit, and stocks provide a better risk-adjusted return for investors. Meanwhile, the rally across top indices like the Nasdaq Composite and the Dow Jones Industrial Average rose by 3% and 14%, respectively.
The Federal Reserve recently announced a new interest rate hike to combat nagging inflation. Although many investors believe the Fed will likely pause its borrowing costs rise, the timeframe to attain this position is uncertain. For that reason, investors are struggling with a barrel of possible several rate rises that might slow down the economy and compress stock valuation.
In the meantime, Corporate America is struggling with a disappointing earnings period that does not match the 2023 market estimates. Other top household companies like Starbucks, Meta, and Apple did not attain their fourth-quarter earnings estimates and have announced cautious forward-looking commentary. Reports indicate that the blended earnings estimate in the S&P 500 sector during the fourth quarter is at a 5.3% drop.
If the estimate marks the actual decline, it will be the first year-on-year decline that the S&P 500 has recorded since 2020. The pressured corporate profit margins and further borrowing cost increases come with numerous pros on Wall Street, but it would be best to watch out for a pullback. Goldman Sachs reports that the current market pricing does not indicate a possible soft landing.
Instead, the pricing so far this year is indicating a takeoff. The current market pricing targets avoiding a recession and curbing inflation. Besides, the market pricing targets central banks to cut rates by mid-2023. In other words, it is not a pricing model that can result in perfection. It is a pricing that is grappling with numerous factors concurrently. In the near term, beyond chasing momentum and FOMO, there is no possibility for pushing the stocks higher.
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