Goldman's Hatzius and Kostin on Markets and Macro in 2025
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Deep Dive
WHY is it a difficult time to make economic forecasts?
It's a difficult time due to increased uncertainty surrounding the policy environment, particularly with a new administration promising major changes in areas like tariffs, immigration, and the size and scope of government.
How does Goldman Sachs coordinate its economic and market outlooks?
Goldman Sachs Research department, comprising nearly a thousand people, maintains close coordination through weekly discussions involving various teams, including macro, commodities, strategy, and rates, to ensure a coherent overall picture.
What is the S&P 500 target for 2025 and what are its key drivers?
The S&P 500 target is 6500, driven by an expected 11% earnings growth in 2025 and 7% in 2026. Sales are projected to grow around 5%, with slight margin expansion. The market multiple is expected to slightly decrease from around 23 times forward earnings to 21.5 times.
What is the impact of potential tariff increases on the economic outlook?
Tariff increases, particularly on imports from China (estimated at a 20 percentage point rise) and potentially on autos from Europe and Mexico, pose the biggest risk to the otherwise positive U.S. growth outlook of 2.5%.
Are tariffs inflationary?
Tariffs raise prices, as seen in previous implementations. However, their impact on ongoing inflation is less clear. They primarily cause a one-time price level increase, similar to a value-added tax, with the inflation effect diminishing after 8 months, assuming no major second-round effects or escalating trade wars.
How are investors reacting to the tariff headlines?
Investors are focused on the potential for increased small business confidence due to an anticipated more favorable business environment under the new administration. This optimism drives investment strategies focused on companies with significant revenue from small and medium-sized businesses.
What could cause the outperformance of mega-cap stocks to diminish?
The superior earnings growth of mega-cap stocks, which has driven their outperformance, is expected to diminish in the coming years. The gap between their earnings growth and the rest of the market is projected to narrow significantly, leading to smaller margins of outperformance.
Do animal spirits matter for the economy?
Surveys, particularly those focused on feelings rather than actions, should be taken with a grain of salt. While small business surveys may show increased optimism, their impact on actual capital spending is likely to be marginal.
What are the main concerns and discussions among investors?
Current discussions revolve around policy uncertainty rather than the underlying economic path. Specific concerns include inflation trajectory, the longer-term neutral funds rate, the impact of trade policy uncertainty on Europe, and market concentration in mega-cap stocks.
What is the potential impact of immigration on the economy?
Immigration has been crucial in boosting growth and potentially easing labor supply constraints, particularly in lower-skilled sectors. However, a recent decline in immigrant inflow, coupled with potential increased deportations, could negatively impact future growth.
What is the likelihood of significant changes in the spending trajectory or trend growth under the new administration?
Achieving ambitious goals like a 3% of GDP federal deficit or 3% trend growth is unlikely. Significant spending cuts face political challenges due to the large proportion of entitlement programs and defense spending. Furthermore, the administration's focus is not on sizable tax cuts.
What is the long-term impact of AI on potential growth?
While the near-term impact of AI-related capital spending on growth is marginal, the longer-term outlook is more optimistic. AI's ability to replace tasks in white-collar jobs could enhance productivity and boost potential growth, although labor market adjustments will occur over time.
- Forecasting is difficult due to policy uncertainty and a new administration.
- Experts from Goldman Sachs provide insights into the 2025 market outlook.
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