The outlook for the stock market is becoming increasingly uncertain, thanks largely to the potential impact of an escalating global trade war.
Strategists at Goldman Sachs on Sunday night slashed their forecast for the S&P 500 for the second time this year, lowering targets for the benchmark index's return to -5% in the coming three months and 6% over 12 months, down from 0% and 16% respectively.
That implies the S&P 500 trading between 5,300 to 5,900 over the next year, the bank said in a note to clients, meaning they don't expect the index to return to previous all-time highs are 6,100 anytime soon.
The downgrade is largely driven by the impact of President Donald Trump's tariff policy, which is shaping up to be more severe than the bank was expecting, according to a team led by Goldman's chief US equity strategist, David Kostin.
The bank now expects the average US tariff rate to hover around 18%, up 15 basis points from last year. It also expects average annual GDP growth to slow to 1.5% from last year's 2%, while core PCE inflation, which is the Fed's preferred inflation measure, will accelerate to 3.5%, up from last year's 3%.
"Higher tariffs, weaker economic growth, and greater inflation than we previously assumed lead us to cut our S&P 500 EPS growth forecasts to +3 in 2025 (from +7%) and +% in 2026 (from +7%)," strategists said. "We expect a further valuation decline in the near term," they added.
The bank also sees the US facing a higher risk of recession in the next year. Goldman economists now estimate that the US has a 35% chance of tipping into a recession in the next 12 months, up from the prior estimate of 20%.
If stocks follow the historical playbook for a recession, the S&P 500 could see a 25% drawdown from its peak, strategists said. That implies the index will drop as low as 4,600 in the event of a downturn, the bank estimated, or a 21% drop from the index's current levels.
"We continue to recommend investors watch for an improvement in the growth outlook, more asymmetry in market pricing, or depressed positioning before trying to trade a bottom," strategists wrote.
Stocks have been mired in a correction after falling more than 10% from mid-February highs, and the S&P 500 is now down 5% since the start of the year.
Markets have been dealing with greater uncertainty stemming from Trump's trade policy and retaliatory tariffs slapped, as well as the growing risk of a recession in the US.
Economic growth has already shown signs of slowing. GDP is expected to contract 2.8% for the first quarter, according to the latest projection from the Atlanta Fed.
Inflation was also hotter than expected last month, with PCE prices accelerating 2.8% year over year.
Wall Street forecasters, including Stifel, UBS, and Bank of America, have been warning of the rising risk of stagflation, a scenario that involves sluggish growth and high inflation and which could be more difficult for the Fed to deal with than a recession.
