Why Goldman Sachs boosted its 2024 stock-market forecast by 9%

• Goldman Sachs raised its S&P 500 price target for 2024 to 5,100 from 4,700 on Friday.
• The 9% increase target was sparked by the Fed turning dovish amid falling inflation.
• "Resilient growth and falling rates should benefit stocks with weaker balance sheets," Goldman Sachs said.

Goldman Sachs bumped its 2024 price target for the S&P 500 just one month after it came out with its projections for next year.

The investment bank increased its 2024 year-end price target to 5,100 from its original forecast of 4,700. That's a 9% raise, and represents potential upside of roughly 8% from current levels.

The swift change to Goldman's projections was sparked by the Fed turning dovish at their FOMC meeting last week as inflation continues to moderate and interest rates fall.

"Decelerating inflation and Fed easing will keep real yields low and support a price-to-earnings multiple greater than 19x," Goldman Sachs' David Kostin said. "Our prior year-end 2024 forecast assumed yields of 2.3% and a price-to-earnings [multiple] of 18x."

Kostin said a string of economic data releases last week showed that inflation is quickly cooling down to the Fed's long-term 2% target.

"By some measures the trend is already at or near 2%," Kostin said.

That means the Fed will have to cut interest rates a lot sooner than investors initially expected. Goldman now expects the Fed to cut interest rates five times in 2024, which is in line with current market expectations, though more aggressive than the Fed's projection of just three interest rate cuts next year.

The economy appears to be in a sweet spot because as inflation continues to fall, retail sales growth has remained above consensus and jobless claims have been lower than expected, confirming that there is still resilience in the labor market.

This dynamic has translated into a solid string of gains for stock prices, with the major indexes notching a seven-week win streak on Friday. And that suggests GDP growth will be strong in 2024.

"The performance of cyclical vs. defensive stocks has moved from pricing GDP growth of 1.5% to above 3% during the last seven weeks," Kostin said.

Fourth-quarter GDP growth estimates from the Federal Reserve Bank of Atlanta have surged over the past week to 2.6% from a prior estimate of 1.2%. A GDP print close to 3% would continue an impressive streak of solid growth following the third-quarter GDP growth print of 5.2%.

That solid economic growth should help fuel rising corporate profits, with Kostin estimating 2024 S&P 500 earnings per share of $237, above consensus estimates of $230.

As to what stocks might outperform in 2024, Kostin recommended investors pay close attention to companies with weak balance sheets, as falling interest rates should significantly lower their cost of capital.

"Resilient growth and falling rates should benefit stocks with weaker balance sheet, particularly those that are sensitive to economic growth," Kostin said. "A lower cost of capital should also allow stocks with weak balance sheets to 'catch up' to the few stocks that have led the market in 2023."