Wall Street may already be sitting near record highs, but Goldman Sachs believes the rally still has legs—thanks to lower yields, mega-cap momentum and the Fed's return to cutting rates, the bank now sees the S&P 500 hitting 6,900 in the next 12 months.
In a new note Monday, David J. Kostin, chief U.S. equity strategist at Goldman Sachs, said he expects the S&P 500 – as tracked by the Vanguard S&P 500 ETF (NYSE:VOO) – to climb to 6,400 in three months, a gain of 3%, 6,600 by year-end, up 6%, and 6,900 within 12 months, an 11% increase.
That's a significant boost from their previous targets of 5,900, 6,100 and 6,500, respectively—and well above the median consensus forecast of 5,975.
Why The Upgrade? Think Fed Cuts And Big Tech
Goldman's forecast shift is built on three key assumptions: earlier and deeper Fed cuts, lower bond yields and the staying power of mega-cap earnings.
The bank now expects the Federal Reserve to cut rates three times within one year, starting in September, followed by two more in 2026. Their rates team sees the 10-year Treasury yield ending 2025 at 4.2%, down from a prior estimate of 4.5%.
According to Goldman, "every 50 basis point decline in real yields is associated with a roughly 3% increase" in the S&P 500's forward price-to-earnings ratio.
Strong first-quarter results from mega-cap names also gave Goldman more confidence that tech leaders can "sustain current investor expectations for their long-term growth."
Market Breadth Still Narrow, But That May Change
Despite the record highs, most stocks still lag behind.
Goldman said the "median constituent remains more than 10 percent below its 52-week high," pointing to extremely narrow market breadth.
The Invesco S&P 500 Equal-Weight ETF (NYSE:RSP) still trades 3% below its record highs hit in late November 2024.
But rather than a correction, Goldman sees a potential shift in leadership. "We believe a ‘catch up' is more likely than a ‘catch down'" as laggards start to recover in the coming months.
Notably, the recent rally has been unusually sharp: since the April low, the S&P 500 is up 25%, ranking above the 99th percentile of three-month returns in the past 50 years.
Earnings Steady For Now, But Tariffs Cloud Outlook
Goldman is sticking with its earnings growth forecasts of 7% for both 2025 and 2026. Still, Kostin indicated uncertainty tied to the evolving tariff landscape, which could pressure margins.
"The shifting tariff landscape creates large uncertainty around our earnings forecasts," he said, though large-cap firms appear buffered by inventory and cost strategies.
3 Investment Plays for the Second Half of 2025
Goldman is positioning for a rally that broadens beyond mega-caps. The firm outlined three key trade ideas:
- Balanced sector exposure, with overweights in Software & Services, Materials, Utilities, Media & Entertainment and Real Estate.
- Alternative asset managers, which lagged despite recovering capital markets.
- Companies with high floating-rate debt, which should benefit from lower rates.
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Image created using artificial intelligence via Midjourney.
