Goldman Sachs grapples with the impact of altered interest rates

In a recent update, Goldman Sachs has revised its outlook for the S&P 500 Index, implying a potential 4.2% decline from Thursday's close. This downward revision comes amidst increasing risks of a recession and rising interest rates.

The yield on two-year US Treasury bonds has seen a significant increase, rising from 0.90% at the start of the year to 4.13% currently. This upward trend in interest rates is a response to the Federal Reserve's efforts to combat inflation, with the US Federal Reserve increasing the key interest rate by 0.75 percentage points yesterday.

Goldman Sachs' valuation model supports a price-to-earnings ratio of 15 for the S&P 500 Index, compared to the current ratio of 18. This lower ratio suggests that the market may be overvalued, supporting the downward revision in the S&P 500's forecast.

Despite this pessimistic outlook, analysts predict a return of almost 26% for the S&P 500 in the next 12 months, albeit with lower price targets for US stocks. Goldman Sachs' new base target is lower than their previous year-end target of 4,300 points for the S&P 500 Index.

In a recession scenario, Goldman Sachs forecasts a low of 3,150 for the S&P 500. However, a year-end rally to 4,300 points is possible if inflation shows clear signs of easing. The 6-month and 12-month targets for the S&P 500, as suggested by Goldman Sachs, are 3,600 and 4,000 points, respectively.

Goldman Sachs advises increased uncertainty requires a defensive positioning. They suggest owning stocks with quality characteristics such as strong balance sheets, high capital returns, and stable revenue growth. The majority of stock investors believe a hard landing (economic recession) is inevitable, with the focus shifting towards the timing, magnitude, and duration of a possible recession.

Since September 12, the S&P 500 has underperformed the Stoxx Europe 600 Index. This underperformance could be a result of the increased risks and uncertainties in the US market. Goldman Sachs has lowered its year-end target for the S&P 500 Index from 4,300 to 3,600 points, reflecting these growing concerns.

In a surprising development, Federal Reserve Chairman Jerome Powell signaled yesterday that he would risk a recession to combat inflation. This statement adds to the uncertainty in the market and could potentially exacerbate the downward pressure on the S&P 500.

Despite the pessimistic outlook, it's important to note that no institution has predicted that the S&P 500 index will fall to 3,600 points in 2022, according to the available search results.

In conclusion, Goldman Sachs' revised outlook for the S&P 500 underscores the growing risks and uncertainties in the US market. Investors should remain cautious and consider defensive positioning in their portfolios.