Why Goldman Sachs has bumped up its S&P 500 target for the third time this year

By Steve Goldstein

The Goldman team say what's really the driver of its newfound optimism is its view on margin expansion

This week marks the kickoff of third-quarter earnings season-and another S&P 500 target upgrade from Goldman Sachs.

A team led by David Kostin made at least their third upgrade to S&P 500 forecasts this year. They now expect the S&P 500 SPX to reach 6,000 in three months' time, versus 5,600 previously, and 6,300 in 12 months' time, versus 6,000 previously.

Their logic is that they are more optimistic on 2025 and 2026 earnings than most of Wall Street. They expect $268 of S&P 500 earnings per share next year and $288 in 2026-which is above the $265 in 2025 and $281 seen by other Wall Street firms, though less than when all of the company earnings estimates are mashed together, which is $275 for 2025 and $307 in 2026.

"From a top-down perspective, our economists' forecast for U.S. GDP growth is above consensus. However, bottom-up analyst consensus EPS estimates are typically overly optimistic and are steadily cut during the forecast period," they say.

The Goldman team say what's really the driver of its newfound optimism is its view on margin expansion. The team expects profit margins to rise to 12.3% next year, from an estimated 11.5% in 2024, and to further increase to 12.6% in 2026. The Goldman team previously expected 24 basis points of margin expansion in 2025 vs. 78 basis points now.

"The macro backdrop remains conducive to modest margin expansion, with prices charged outpacing input cost growth," they say.

Some of that margin shift also is due to expectations that elevated in-process research-and-development costs for healthcare companies, including Bristol-Myers Squibb (BMY), will normalize, and that charges that Warner Bros. Discovery (WBD) and Uber Technologies (UBER) took this year won't repeat. They also now expect a recovery in the semiconductor cycle as well as ongoing strength for mega-cap techs. "While the magnitude of beats may moderate, the recent GS Communacopia Conference indicated strong ongoing AI demand that should benefit these stocks," they say.

The markets

U.S. stock futures (ES00) (NQ00) slipped after rallying Friday on the jobs data. Oil futures (CL00) rose as Hamas fired missiles on central Israel, while Israel continued to attack Lebanon ahead of a possible strike on Iran. The 10-year Treasury yield BX:TMUBMUSD10Y hit 4%.

   Key asset performance                                                Last       5d      1m      YTD     1y 
   S&P 500                                                              5751.07    -0.20%  5.12%   20.57%  32.65% 
   Nasdaq Composite                                                     18,137.85  0.10%   8.67%   20.83%  35.04% 
   10-year Treasury                                                     4.009      22.20   30.50   12.81   -79.50 
   Gold                                                                 2676.8     0.76%   5.57%   29.20%  42.76% 
   Oil                                                                  76.33      11.77%  10.94%  7.01%   -11.63% 
   Data: MarketWatch. Treasury yields change expressed in basis points 

The buzz

Starboard has reportedly taken a $1 billion stake in Pfizer (PFE) and is seeking a turnaround.

Rio Tinto (RIO) has expressed an interest in buying Arcadium Lithium (ALTM), both companies said.

AstraZeneca (AZN) agreed to pay up to $2 billion to license a cardiovascular drug candidate.

Chevron (CVX) said it's selling $6.5 billion of interests in Canadian oil sands projects to Canadian Natural Resources (CA:CNQ).

Barclays downgraded Netflix (NFLX) to underweight, arguing the present valuation appears unrealistic given long-term margin and free cash flow expectations, while Piper Sandler upgraded the same company to overweight from neutral, saying the stock "is expensive for a reason."

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The chart

Morgan Stanley strategists led by Mike Wilson say the stock-market reaction to payrolls data was to be expected, because the market is currently in a "good is good" environment-which is demonstrated now by the positive correlation between stock market returns and bond yields. "In our view, 'good' (growth/labor data) will be particularly "good" for quality cyclicals. These stocks have upside exposure to better macro data and yet, due to stronger balance sheets, aren't as adversely exposed to a higher yield environment," they say.

Top tickers

Here were the most active stock-market tickers as of 6 a.m. Eastern.

   Ticker  Security name 
   NVDA    Nvidia 
   TSLA    Tesla 
   GME     GameStop 
   NIO     Nio 
   PLTR    Palantir Technologies 
   BABA    Alibaba 
   TSM     Taiwan Semiconductor Manufacturing 
   AAPL    Apple 
   HOLO    MicroCloud Hologram 
   AMZN    Amazon.com 

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-Steve Goldstein

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10-07-24 0651ET

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