Investing.com -- Goldman Sachs strategists have raised their 2025 S&P 500 earnings per share (EPS) forecast to $268, marking an 11% year-over-year increase, up from their previous estimate of $256 (+6%). Also, they have introduced a 2026 EPS estimate of $288, reflecting a 7% growth, while maintaining their full-year 2024 EPS forecast at $241.
The Wall Street firm’s projections for 2025 and 2026 EPS—$268 and $288, respectively—are higher than top-down consensus estimates ($265 and $281) but below bottom-up consensus ($275 and $307).
While their strategists foresee U.S. GDP growth outperforming consensus, they note that bottom-up EPS estimates tend to be overly optimistic and are frequently revised downward.
“Our 2025 and 2026 EPS estimates imply a 3% negative revision to bottom-up consensus each year, slightly less negative than the historical pattern,” strategists said in a recent note.
Looking at the nearer term, analysts have reduced expectations for 3Q 2024 EPS growth from 9% to 4%, a notable change from the 11% growth seen in 2Q.
Citing their macro model data, Goldman’s strategists said the S&P 500’s current forward price-to-earnings (P/E) ratio of 22x is aligned with fair value. They expect this multiple to remain flat at 22x by the end of 2024 but may contract slightly to 21x within the next 12 months.
Over the next three months, the bank anticipates minimal shifts in the macro environment. However, it cautions that valuations could fluctuate as markets digest the potential policy outcomes of the 2024 U.S. elections.
Looking further ahead, they forecast slower economic and earnings growth for 2026, along with modestly higher real yields, which may drive a slight contraction in the price-to-earnings (P/E) multiple.
As such, Goldman’s updated outlook suggests a 3-month S&P 500 price target of 6000, up from a prior estimate of 5600. They also set a 6-month target of 6100 and a 12-month target of 6300, compared to their previous forecast of 6000.
Strategists assume the market will capitalize EPS of $274 by year-end—representing a 1% reduction from bottom-up consensus—and $300 in 12 months, a 2% revision. This implies a 10% price return over the next year, slightly below the median 12% return since 1980.
"We believe returns will be constrained by an elevated starting valuation," the strategists note.
They also outline potential risks to their forecast. If the P/E multiple stays at 22x, the S&P 500 could reach 6600 in 12 months, delivering a 15% upside.
Historically, periods where valuations exceeded their model’s fair value have occurred during post-recession recoveries, though the strategists note that the 1998 cycle saw both economic growth and a Fed rate-cutting environment lead to a 40% overshoot of fair value.
Should the P/E rise to 23x, similar to the average in 2021, the S&P 500 could hit 6900, a 20% gain. However, if growth weakens, the index could drop to 18x, or 5400, representing a 6% downside.