Goldman Sachs released three heavyweight research reports over the weekend: lowering the forecast for the U.S. recession, expecting the Chinese stock market to rise another 15% to 20%

Over the past weekend, Goldman Sachs released three important research conclusions that are expected to benefit the US stock market and the Chinese stock market.

Firstly, its stock strategy team raised the year-end target for the S&P 500 index to 6000 points, which is a 4.3% increase from last Friday's closing price, and raised the 12-month target to 6300 points.

Secondly, its economic team lowered the possibility of a recession in the United States in 2025 from 20% to 15%. Thirdly, its Asia-Pacific strategy team upgraded the rating of Chinese stocks to "Buy" and is optimistic about the potential boost in valuation from large-scale stimulus measures.

Ahead of the third-quarter earnings season, Goldman Sachs raised its EPS profit forecast for the next two years for US stocks, but the economy is key

Let's first look at the conclusion of David Kostin, Chief US Stock Strategist at Goldman Sachs. He raised the target for the S&P 500 for the next three months (until the end of 2024) from the previous 5600 points to 6000 points, and the 12-month target from 6000 points to 6300 points.

This week will see the opening of the third-quarter earnings season led by bank stocks such as JPMorgan Chase and Wells Fargo. This renowned strategist took the opportunity to raise the EPS earnings forecast for the S&P 500 in 2025 from $256 (a 6% year-on-year increase) to $268 (an 11% year-on-year increase), raised the EPS forecast for 2026 to $288 (a 7% year-on-year increase), and maintained the EPS forecast for this year at $241 (an 8% year-on-year increase):

On one hand, the above long-term earnings forecasts reflect stable macroeconomic prospects, with economic performance being a key variable in the model that can explain at least half of the fluctuations in S&P 500 EPS growth.

At the same time, the upward revision of EPS forecasts for the S&P information technology sector for next year is related to the semiconductor cycle recovery, which may attribute 20% (or $7) of the S&P 500 EPS growth in 2025 to semiconductor stocks.

However, the benign macroeconomic outlook characterized by near-trend GDP growth and tight labor market conditions also implies limitations on companies' ability to expand profits.

Goldman Sachs' forecast indicates that by the end of 2024, the S&P 500 P/E ratio will remain at 22 times, and then slightly contract to 21 times within 12 months. However, if the economic growth outlook weakens, the S&P P/E ratio may fall to 18 times, resulting in a 6% decline in the S&P 500 to 5400 points.

Goldman Sachs revises down the probability of a US recession in the next year to the long-term average of 15%, mainly due to unexpectedly strong September nonfarm payrolls

Next, Goldman Sachs Chief Economist Jan Hatzius revised down the probability of a US recession in the next 12 months to the long-term average of 15%, mainly due to the strong US nonfarm payrolls report released last Friday. After a surge in nonfarm unemployment rates in June and July, he had raised the probability of a US recession to 25% in AugustThe research report stated that "the September employment report redefined the narrative of the labor market", indicating that strong job growth and revisions to July and August data have temporarily eased concerns about labor demand being too weak to prevent further increases in the unemployment rate:

"Like many investors, we have been closely monitoring the competition between job growth and labor supply growth.

We expect labor supply growth to slow significantly, but to remain at a sufficiently high level, therefore requiring the addition of 150,000 to 180,000 new jobs per month to stabilize the unemployment rate.

While employment numbers have been volatile, we have not seen a clear basis for further sustained negative revisions. More broadly, we believe that in a situation where job vacancies are high and GDP growth is solid, there is no obvious reason for job growth to be mediocre."

Based on this, the Goldman Sachs economic team stated that the rebound in job growth has put the Federal Reserve "currently" on a path to cut interest rates by 25 basis points, expecting the FOMC to cut rates by 25 basis points at each meeting until June 2025, bringing the rate range down to 3.25% to 3.50%:

"If job growth remains robust and the unemployment rate no longer rises further, the timing of when to stop cutting rates, as well as how quickly to reach the above rate target, may become topics of discussion in next year's Federal Reserve framework review."

Goldman Sachs upgrades China's stock market rating to "Buy", estimating a further 15% to 20% significant upside potential

Lastly, looking at the Goldman Sachs Asia Pacific strategy team's forecast for the Chinese stock market, they have upgraded their rating on Chinese stocks to "Buy", believing that "the catalysis of more substantive policy measures" and "the market background of overselling and underweight positions previously" are the two key factors driving the significant market rally.

Furthermore, Goldman Sachs believes that there is still room for further upside in the Chinese stock market after a strong rebound, estimating an additional 15% to 20% upside potential, but it is still uncertain whether a structural bull market has begun, and the scale and details of fiscal policy responses have not yet been announced:

"Firstly, the valuation of the Chinese stock market has rebounded from an extremely low level of 8.4 times, still below the mid-range level of 11.3 times expected earnings, and lower than the five-year average of 12.1 times, indicating potential for valuation to return to normal levels if policies support the economy. Empirical research shows that fiscal stimulus is closely related to stock market valuation expansion.

Secondly, our DDM model indicates that the market's implied cost of equity (ICOE) has recently been at a high level, reflecting market concerns about downside risks to economic growth. However, strong policy measures and signs of willingness to take further actions have mitigated these risks, which should lead to a decrease in ICOE, supporting expectations for further valuation recovery.

Thirdly, if the economy responds to policies as predicted by our economists, corporate profit growth may improve beyond current conservative forecasts. Improvements in corporate profits often support valuation expansion.

Finally, holdings in the Chinese stock market are still relatively light and are expected to improve as risk appetite rises. Although hedge funds have rapidly increased their risk exposure to China, they are still at the 55th percentile in the five-year range (note: moderate level), while the peak exposure in January 2023 when China's economy reopened and drove the market rebound was at the 91st percentile."(There is room for improvement).

At the end of August, the proportion of mutual funds' holdings in the Chinese stock market was '310 basis points lower than the benchmark'. Onshore investors have also started to increase margin financing from a low level, which is consistent with the situation of rising risk appetite during the policy support in 2015."