Upgrade S&P 500 index valuation and return forecast! Goldman Sachs: Three investment recommendations at the beginning of the second half of the year

According to Zhitong Finance APP, trade/tariffs remain the focus today, as Trump officially extended the tariff suspension period to August 1, and hinted overnight that the August 1 deadline is "not 100% certain," leaving room for further negotiations. Goldman Sachs has raised its return forecasts for the S&P 500 index to +3% (6,400 points), +6% (6,600 points), and +11% (6,900 points) for 1 month, 3 months, and 12 months, respectively.

Japanese Prime Minister Shigeru Ishiba stated that the 25% tariff is "indeed regrettable," but he will push for an agreement as soon as possible; the European Union is seeking to reach a preliminary trade agreement this week to lock in the 10% tariff rate beyond August 1 (Bloomberg); Bessent indicated that he expects to meet with his Chinese counterparts in the coming weeks.

In June, the volume of U.S. stock issuances reached the highest level since October 2024 (see chart below), and Goldman Sachs' IPO barometer currently stands at 118 (100 = average IPO issuance level).

Upgraded S&P 500 Index Valuation and Return Forecasts

Goldman Sachs has raised its return forecasts for the S&P 500 index to +3% (6,400 points), +6% (6,600 points), and +11% (6,900 points) for 1 month, 3 months, and 12 months, respectively.

The Federal Reserve's earlier and deeper rate cuts, lower-than-expected bond yields, the continued strong fundamentals of large stocks, and investors' willingness to overlook potential near-term earnings weakness support Goldman Sachs' increase of the S&P 500 index's forward price-to-earnings ratio forecast from 20.4 times to 22 times. Goldman Sachs' previous index targets were 5,900 points, 6,100 points, and 6,500 points, respectively.

Goldman Sachs maintains its earnings per share growth forecast (2025 +7%, 2026 +7%), but sees risks in both directions and will reassess after the second-quarter earnings announcements. The changing tariff situation brings significant uncertainty to Goldman Sachs' earnings forecasts, with the 2025 forecast roughly in line with consensus but below the 2026 consensus. The main downside risk to Goldman Sachs' earnings per share forecast is the final level of tariffs and their impact on corporate profits.

After a narrow rise, Goldman Sachs expects recent rotations to occur beneath the surface of the index. The S&P 500 index recently climbed to a new record high, and further increases would align with historical patterns following the Fed's resumption of rate cuts.

However, the median constituent stocks are still more than 10% below their 52-week highs, leading to one of the narrowest market breadth readings in decades. While narrow breadth typically signals a greater-than-average risk of a pullback, Goldman Sachs believes that "catch-up" is more likely than "catch-down," and expects the market's upward momentum to expand in the coming months. The market currently holds an optimistic outlook on economic growth and the Fed's rate cuts, but stock investors' positions remain well below levels seen earlier this year. Chart: Market breadth has sharply narrowed in recent weeks (as of July 3, 2025)

[Percentage below the 52-week high: Difference between the S&P Index and the median stock (market breadth) (the lower the value, the narrower the breadth)]

Three investment recommendations at the beginning of the second half of 2025:

(1) Balanced sector allocation, overweighting software and services, materials, utilities, media and entertainment, and real estate.

(2) Alternative asset management companies, although the capital market backdrop has improved, their performance still lags behind macro implied returns.

(3) Companies with high floating-rate debt, as earnings estimates will benefit from lower bond yields.

Chart 1: Goldman Sachs' forecast for the S&P 500 Index price and earnings per share

Chart 2: Distribution of S&P 500 Index price targets by the end of 2025

Chart 3: Goldman Sachs predicts that the forward price-to-earnings ratio of the S&P 500 Index will remain around 22 times

S&P 500 Index price-to-earnings ratio multiple for the next 12 months