A bigger bullish driver for stocks than the speed of rate cuts: Goldman Sachs By Investing.com

Recent swings in stocks reflect a downgraded outlook for economic growth, yet the outlook for Federal Reserve easing has held near an all-time high.

Goldman Sachs predicts a 25 basis point cut by the Fed next week and anticipates 200 basis points of easing through the first quarter of 2026, compared to market expectations of 260 basis points. By comparison, the futures market currently assigns a 45% probability of a 50 basis point cut next week and is pricing in 115 basis points of full Fed easing for 2024, along with another 140 basis points of cuts in 2025.

However, the bank’s strategists point out that the growth trajectory is now a more important driver for shares than the pace of rate cuts.

For much of the past few years, when inflation has driven Fed policy, the correlation between stock and bond yields has been negative. In this environment, strong economic growth raised inflation concerns and suggested further Fed tightening, leading the market to believe that “the good news was bad news.”

Recently, however, this relationship has returned to a positive correlation, meaning “good news is good news,” Goldman pointed out in a note on Friday.

“If market prices have relaxed less as the economy proves resilient, stocks will rise despite higher bond yields,” the strategists explain. On the other hand, if weaker economic data leads the market to price in more Fed easing, stocks are likely to struggle even as bond yields fall.

In their baseline outlook, Goldman Sachs expects resilient economic growth to result in higher bond yields and continued earnings growth, leading to moderately higher share prices.

The Wall Street firm maintains a year-end 2024 price target for the S&P 500 of 5,600, with 6-month and 12-month targets of 5,700 and 6,000, respectively.