Goldman Sachs Lowers S&P 500 Targets, Increases U.S. Recession Probability

Goldman Sachs, one of Wall Street’s most influential investment banks, has lowered its S&P 500 targets and increased the probability of a U.S. recession next year. This change reflects concerns about the economic damage caused by President Donald Trump’s tariffs.

This change is particularly gloomy because Goldman has been known for its more optimistic growth expectations over the years, and has been correct in its predictions. It was one of the few forecasters to predict that the Federal Reserve’s rapid interest rate hikes in 2022 would not lead to a recession.

On Sunday, two teams released notes expressing dimmer expectations for stocks and the economy. Strategists led by David J. Kostin now forecast the S&P 500 to fall 5% to 5,300 over the next three months, compared to their previous forecast that the index would remain flat. For the next 12 months, they forecast the index will rise only 6% to 5,900, down from a previous forecast of a 16% gain. They also lowered their earnings growth forecasts for 2025.

Separately, Jan Hatzius‘s economics team raised the probability of a recession in the next 12 months to 35% from 20%. This reflects higher assumptions about tariffs ahead of what Trump is calling “Liberation Day,” when new tariffs on imports are set to take effect.

This will increase inflation and weaken growth, they said. The economics team raised their year-end inflation forecast to 3.5% based on the Federal Reserve’s preferred personal consumption expenditures index, well above the Fed’s 2% target, which will make it difficult for Chair Jerome Powell to cut interest rates.

At the same time, Goldman’s year-end GDP forecast was revised down by half a point to a 1% increase. This led to an increase in their unemployment rate forecast from 4.2% to 4.5%.

The equities team sought a more optimistic perspective. They noted that their sentiment indicator, though sharply down, remains higher than the levels seen after previous major sell-offs. They suggested focusing on stocks with the least earnings growth variability and those that are generally not correlated with major themes driving market pricing.

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