Goldman Sachs has raised its forecasts for U.S. credit spreads due to increased trade policy risks and indications that the Trump administration may accept short-term economic weakness. The firm anticipates wider spreads as markets adjust to the consequences of new U.S. tariffs on corporate borrowing costs.
Additionally, Goldman Sachs has reduced its 2025 year-end target for the S&P 500 from 6,500 to 6,200, which equates to a 4% decline in its fair-value forward price-to-earnings multiple. The earnings per share estimates for the index have also been decreased, with a new expectation of $262 EPS for 2024 and $280 for 2025.
Despite these adjustments, Goldman remains positive about U.S. equities; however, concerns about stagnant Fed interest rates and geopolitical issues, including tariffs, may limit valuation growth in the short term.
Rising Corporate Borrowing Costs
Goldman Sachs’ decision to raise its projections for U.S. credit spreads stems from concerns that borrowing costs for companies will continue to rise. Higher trade risks, primarily linked to new tariffs, are creating an environment where lenders demand greater compensation for potential losses. The willingness of policymakers to tolerate short-term economic slowdowns only adds to this dynamic. If businesses face higher interest rates when issuing debt, their profitability could take a hit. Investors will need to assess how much of this has already been priced into corporate bonds.
The revision to the S&P 500 forecast paints a picture of lower-than-expected price growth for equities. By cutting the target from 6,500 to 6,200, the bank has effectively signalled that stocks may not appreciate as quickly as previously assumed. A 4% reduction in the forward price-to-earnings multiple suggests that companies will have to generate stronger profits to justify current valuations. The downward revisions for earnings per share add to the cautious outlook, with $262 expected in 2024 and $280 in 2025. These figures imply that analysts believe revenue growth or cost efficiency may not offset potential pressures from trade policy or economic conditions as much as before.
Impact Of Geopolitical Uncertainty
While Goldman remains optimistic on U.S. equities overall, risks tied to the Federal Reserve holding interest rates steady and ongoing geopolitical tensions could weigh on prices. If borrowing stays expensive and uncertainty persists regarding trade, this could limit investor enthusiasm. Markets tend to reward stability, and the confluence of these challenges may curb how aggressively valuations expand. Those involved in leveraged financial instruments must consider how these elements will influence market positioning, particularly as volatility expectations shift. The effect of these developments will be more than just theoretical in the weeks ahead.
