Need to Know: Goldman Sachs turns more optimistic on the S&P 500. The Fed will play a part.

Look for an 11% gain in stocks over the next 12 months, say strategists

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Need to Know       Goldman Sachs lifts its S&P 500 forecasts. Strategists say these three investment moves are crucial.   By Barbara Kollmeyer   Look for an 11% gain in stocks over the next 12 months, say strategists

Mr Blue Sky. Goldman Sachs has lifted its S&P 500 forecasts, and strength from the biggest stocks is one reason for that optimism. PHOTO: GETTY IMAGES   After the White House kicked the tariff down the road again, investors are once again left trying to figure out what that could mean for their investments. Beware, says Ipek Ozkardeskaya, senior analyst at Swissquote Bank, who sees a market acting "suspiciously optimistic," and ignoring the potential fallout from tariffs on supply chains, earnings, growth and inflation. "Assuming everything will be magically resolved in the next three weeks is like seeing unicorns in the sky," she writes. Our call of the day from Goldman Sachs leans on the optimistic side, with strategists forecasting another 11% gain for the S&P 500 SPX over the next 12 months and rising nearer term. A team led by Goldman's chief U.S. equity strategist David Kostin now expect the S&P 500 to reach 6,900 in the next 12 months, up from a prior view of 6,500. Over the next three months, they expect a 3% gain, taking it to 6,400 (from 5,900) and over six months, a 6% gain to 6,600 (from 6,100). "A resilient outlook for 2026 earnings growth, the resumption of Fed rate cuts, and neutral investor positioning argue for further market upside as the recent narrow rally broadens," said Kostin and his team.

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They see "earlier and deeper Fed easing" and lower bond yields than previously forecast and continued strong fundamentals for the largest stocks, with investors willing to look through any near-term earnings weakness. Their S&P 500 forward price-to-earnings forecast has increased to 22 times from 20.4. While they expect S&P 500 earnings per share (EPS) to rise 7% in both 2025 and 2026, the Goldman team acknowledge risks in both directions and plan to revisit those forecasts after second-quarter results season. "The shifting tariff landscape creates large uncertainty around our earnings forecasts, which are roughly in line with consensus in 2025, but below consensus in 2026. The key downside risk to our EPS forecast is the ultimate level of tariffs and their impact on corporate profits," said Kostin and co. That said, they expect tariff digestion "to be a gradual process" and say large-cap companies "seem to have some buffer from inventories ahead of the increase in tariff rates." The strategists said given the S&P 500's recent record climb, further upside would be in line with history following the resumption of Fed rate-cutting cycles. That said, the median index constituent is still more than 10% below its 52-week high, "leading to one of the narrowest readings of market breadth in recent decades." In layman's terms that means far fewer S&P 500 constituents are participating in this rally. Again Goldman is optimistic: "While narrow breadth often signals the risk of larger-than-average drawdowns, we believe a 'catch-up' is more likely than a 'catch-down' and expect the market rally to broaden during the next few months," they said. The market is also pricing in a more optimistic growth forecast, while investor positioning remains well below levels seen earlier this year, they noted.   Investors are still not overloaded with stocks, another reason for the S&P 500 to rise, say Goldman strategists. CHART: GOLDMAN SACHS   The strategists suggest investors follow three key pieces of advice when it comes to stock allocation as the second half of the year gets under way. The first recommendation is a balanced portfolio. They suggest owning those areas with strong idiosyncratic growth, such as software and services and media and entertainment; the materials sector as a cyclical laggard; and two defensive sectors, utilities and real estate. The second is exposure to alternative asset managers, which have "lagged behind macro-implied returns despite an improving capital markets backdrop." Finally, they suggest investors look for companies with high floating rate debt as earnings estimates will benefit from lower bond yields. Kostin and his team said as perceived economic and earnings risk from tariffs keeps fading, investors will keep looking for those laggards that haven't participated in the rally that's proved thin so far. Here's their screen of Russell 3000 stocks with high short interest, a negative correlation with bond yields and low valuations. Kohl's KSS, Intellia Therapeutics NTLA, Gogo GOGO, Plug Power PLUG and Apellis Pharmaceuticals APLS make up the top five:     The markets     U.S. stock futures ES00 YM00 are mostly flat, with tech NQ00 on the stronger side, as Treasury yields BX:TMUBMUSD10Y BX:TMUBMUSD02Y inch up and the dollar DXY edges lower. Key asset performance Last 5d 1m YTD 1y S&P 500 6229.98 0.52% 3.17% 5.92% 11.71% Nasdaq Composite 20,412.52 1.04% 3.54% 5.71% 10.76% 10-year Treasury 4.397 15.40 -8.30 -17.90 9.60 Gold 3344.6 0.89% -0.06% 26.72% 41.34% Oil 67.74 4.26% 3.61% -5.75% -17.61% Data: MarketWatch. Treasury yields change expressed in basis points The buzz Solar stocks such as SunRun RUN and Enphase Energy ENPH are lower after the White House said it would enforce ending clean-electricity tax credits more quickly than expected. Exxon Mobil XOM said second-quarter profit could take a hit of more than $1 billion from lower oil prices and just under $1 billion from weaker natural-gas prices. Alphabet GOOGL-owned Waymo, has begun testing its autonomous cars in New York and plans to expand that to Philadelphia this year. Meta META reportedly lured away an Apple AAPL engineer and top AI models executive with a contract worth tens of millions of dollars. Kevin Warsh, the former Fed governor seen most likely to replace Jerome Powell has a plan to lower interest rates. The New York Fed's monthly measure of consumer inflation expectations is due at 11 a.m. Eastern, while consumer credit data is due for release at 3 p.m. There's a $58 billion auction of 3-year notes. Best of the web No tax on Social Security? Not quite. What the tax megabill really means for seniors. The life swap dream – or a marketing gimmick? The Italian towns selling houses for €1 There's more information than ever on ESG investing, but it isn't helping The chart   CHART: J.P. MORGAN   Here's a snippet of a chart from J.P. Morgan's Data Assets and Alpha Group, who show reaction by the S&P 500 and other major indexes to Liberation Day tariffs over a day, week and a month, and then Monday's reaction to President Donald Trump's tariff letters. Across the board, the one-day market reaction to Monday's letters was dramatically lower than Liberation Day's bigger selloff. Top tickers These were the top-searched tickers on MarketWatch as of 6 a.m.: Ticker Security name TSLA Tesla NVDA Nvidia GME GameStop PLTR Palantir Technologies WOLF Wolfspeed AAPL Apple AMD Advanced Micro Devices PLUS EPlus TSM Taiwan Semiconductor Manufacturing AMZN Amazon.com Random reads Don't show up to Milan's La Scala in flip flops. A Starbucks latte topped with sweeping views of North Korea. Wimbledon's new robotic line judges are most unpopular.

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