Goldman Sachs Cautious on Stock Upside in 2024 Despite Current Rally

GS Stock

While stocks have surged this year, experiencing a more than 17% increase in the S&P 500 (^GSPC), Goldman Sachs expresses caution about the potential upside in 2024. According to the firm, the S&P 500 is expected to close at 4,700 in 2024, reflecting a modest 5% rise from current levels and falling below the typical 8% return seen in election years.

Goldman Sachs (NYSE:GS) Chief US Equity Strategist, David Kostin, noted in the firm’s outlook for the next year that while macro forecasts suggest a favorable outcome for equities, the starting point in the current market conditions could limit the benchmark US equity index’s appreciation in 2024.

Although Goldman’s economics team maintains a bullish stance on the economy, foreseeing a mere 15% chance of a recession in 2024, the equity strategy team contends that the anticipated 2.1% GDP growth in the coming year is already factored into stock prices. Despite recent improvements in company profit margins, Kostin’s team argues against expecting further expansion beyond current levels in 2024, suggesting that the market currently has appropriately priced stocks.

Goldman envisions most of the potential upside in the S&P 500 concentrated in the latter half of 2024, aligning with its prediction for Fed rate cuts in the fourth quarter. Kostin anticipates resilient economic growth at the start of the year, leading the market to revise its current expectation of Fed cuts beginning in the second quarter. Additionally, he points out that US election uncertainty may dampen risk appetite initially, with the market gaining momentum later in the year following the first Fed cut and resolution of election uncertainty.

Goldman’s projections suggest that the “Magnificent 7” stocks will outperform the other 493 in the S&P 500 in 2024. However, concerns arise about whether the success of tech giants like Nvidia, approaching all-time highs again, is already factored into 2024 expectations. Kostin acknowledges the superior attributes of these seven stocks but highlights that the risk/reward profile may not be handsome given elevated expectations, drawing parallels to the tech bubble burst in 2000.

In terms of investment recommendations, Goldman emphasizes that 2024 will favor “high-quality” stocks, including growth stocks with high returns on capital and beaten-down cycle plays. Notable stocks in Goldman’s quality basket include Alphabet (NASDAQ:GOOGL), O’Reilly Automotive (NASDAQ:ORLY), Tractor Supply (NASDAQ:TSCO), and Sherwin-Williams (SHW). The overall outlook is framed with the title “All You Had to Do Was Stay,” a reference to Taylor Swift’s song from the 1989 album, suggesting that staying invested through intermittent volatility will ultimately reward fund managers.

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