The S&P 500 is the benchmark index most investors use to measure performance, and for good reason. It comprises 500 of the largest companies in America, crisscrossing industries.
The index represents the U.S. economy's strength or weakness. It's a leading indicator because market participants make buy-and-sell decisions, anticipating what may happen next.
Earlier this year, those participants grew very anxious. Weakening jobs data and sticky inflation already had investors jittery about stagflation. President Trump's harsher-than-expected tariffs put an outright recession on the table.
Things have changed recently, though. Trump's Liberation Day tariff announcement sent stocks reeling to new lows, prompting him to reverse course on April 9, when he paused implementing many of his tariffs for 90 days to negotiate trade deals.
The S&P 500, which had become oversold, has marched in a straight line higher since then, bullied up by hopes that negotiations would rein in the worst of the tariffs, including the sky-high 145% tariff on Chinese goods.
The S&P 500 has gained over 13% since its April lows, and following Trump's reduction of China tariffs to about 30% on May 12, Goldman Sachs has reset its S&P 500 forecast.
The S&P 500 could head higher in the coming year as trade deals materialize, according to Goldman Sachs' new price target.Image source: Nagle/Bloomberg via Getty Images
The Fed sits, the economy stutters, tariffs change
The Federal Reserve finds itself backed into a corner this year. After engaging in the most restrictively hawkish monetary policy since Chair Paul Volcker battled inflation in the 1980s, current Chairman Jerome Powell was forced to about-face and cut rates three times in 2024 to shore up a weakening jobs market.
The dovish shift by the Fed late last year shaved 1% off the Fed Funds Rate, but the Fed had to abort more cuts when inflation ticked higher and amid Trump's imposing inflationary tariffs.
President Trump instituted 25% tariffs on Mexico and Canada in February. On April 2, he unleashed a torrent of reciprocal tariffs, kicking off a trade war with China that lifted Chinese tariffs to 145%. He also instituted 25% tariffs on autos, sending shockwaves throughout the industry, which relies heavily on imported cars, trucks, and auto parts.
The threat of higher prices because of new import taxes has left the Fed in a big bind.
Its dual mandate is low inflation and unemployment, two often competing goals. Cutting rates this year risks adding more fuel to inflation's fire, but it would help jobs. Raising rates would pressure a jobs market already in trouble if inflation skyrockets because of tariffs.
Last month, the unemployment rate was 4.2%, up from 3.4% in 2023. According to the monthly Job Openings and Labor Turnover Survey (JOLTS), there were also over 900,000 fewer unfilled jobs last month. Companies have announced 602,493 layoffs this year, up 87% year over year, partly due to Department of Government Efficiency job cuts.
That's not great. And the economy reflects it. In Q1, Gross Domestic Product (GDP) contracted 0.3%.
With that backdrop, it's little wonder that investors got antsy. The S&P 500 fell 19% from its all-time high in February to its low on April 8, just missing bear market territory.
Market animal spirits return amid trade optimism
The stock market's swoon since February was arguably a self-inflicted wound, given that most losses came after Trump's tariff announcements.
The Trump administration, however, has always seemed to pay attention to the markets, and this time appears no different.
The stock market's retreat, plus sell-offs in the U.S. Dollar and Treasury bonds, likely contributed to Trump's quick pivot on tariff policy on April 9.
Most reciprocal tariffs were paused except China's, shifting markets from worrying over the next tariff drop to becoming flat-footed amid what may prove to be a steady slate of positive trade deal news.
That shift hasn't been lost on Goldman Sachs, one of the most prominent Wall Street research firms.
Like most, Goldman Sachs ratcheted its S&P 500 outlook lower on recession risk amid the tariffs-driven sell-off.
Now, it's ratcheting its forecast higher again.
On May 12, Trump announced that weekend negotiations between the U.S. and China were fruitful enough to roll back tariffs to 30%, comprising a 20% fentanyl tariff instituted in February and a 10% baseline tariff that brings China in line with the rest of the world.
The news took an economic Armageddon potentially off the table, allowing Goldman Sachs to ramp up its S&P 500 outlook due to higher revenue and profit potential.
"While we had expected a de-escalation, the rate is lower than the +54pp tariff hike we had penciled into our baseline," wrote Goldman Sachs analysts in a note to clients. "We raise our S&P 500 return and earnings forecasts to incorporate lower tariff rates, better economic growth, and less recession risk than we previously expected."
Goldman Sachs expects S&P 500 companies to deliver earnings per share of $262 in 2025, up 7% year over year, and $280 in 2026, also up 7%.
"These estimates reflect better-than-expected 1Q 2025 results and a stronger U.S. economic growth outlook in coming quarters," wrote Goldman Sachs. "Our previous EPS growth estimates were +3% and +6%, respectively."
Additionally, Goldman Sachs increased its forward price-to-earnings outlook for the S&P 500 to 20.4 from 19.5.
"Our updated fair value estimate reflects reduced uncertainty, faster earnings growth, lower inflation, and renewed confidence in the fundamentals for the largest stocks in the index," wrote Goldman Sachs.
Overall, Goldman Sachs has reset its S&P 500 price targets to 5,900 for the next three months and 6,500 in 12 months, up from 5,700 and 6,200, respectively. Its six-month target is 6,100, up about 4% from here, and above its prior 5,900 outlook.
