Recent equity rotations reflect a downgraded outlook for economic growth, yet the prospect of Federal Reserve easing has kept the S&P 500 near its all-time high.
Goldman Sachs predicts a 25 basis point cut by the Fed next week and anticipates 200 basis points of easing by 1Q 2026, compared to market expectations of 260 basis points. For comparison, the futures market currently assigns a 45% probability to a 50 basis point cut next week and is pricing in 115 basis points of total Fed easing for 2024, along with an additional 140 basis points of cuts in 2025.
However, the bank’s strategists emphasize that growth trajectory is now a more important driver for stocks than the pace of rate cuts.
For much of the past few years, when inflation drove Fed policy, the correlation between equities and bond yields was negative. In this environment, strong economic growth raised inflation concerns and suggested additional Fed tightening—leading the market to believe that “good news was bad news.”
Recently, however, this relationship has shifted back to a positive correlation, meaning “good news is good news,” Goldman highlighted in a Friday note.
"If the market prices less Fed easing because the economy proves resilient, equities will rise despite higher bond yields," strategists explain. On the other hand, should weaker economic data leads the market to price in more Fed easing, equities are likely to struggle even as bond yields decline.
In their baseline outlook, Goldman Sachs expects resilient economic growth to result in modestly higher bond yields and continued earnings growth, driving moderately higher equity prices.
The Wall Street firm maintains a year-end 2024 S&P 500 price target of 5600, with rolled 6-month and 12-month targets of 5700 and 6000, respectively.