Goldman Sachs Raises S&P 500 Target Amid AI Boom

• Goldman Sachs raised its year-end price target for the S&P 500 to 4,500.
• That represents a 5% upside from current levels, and a 17% increase for the index in 2023.
• Those gains will be due to the boom in AI, which could boost the overall market.

Goldman Sachs raised its price target for the S&P 500 in 2023, anticipating the index would move higher thanks to Wall Street’s excitement for artificial intelligence and bullish indicators around the current stock market rally.

The bank predicted the S&P 500 would end the year at 4,500, up from its previous estimate of 4,000. That implies around a 5% upside from current levels, and a 17% increase for the year. The benchmark index finished 2022 at 3,839.

Strategists reiterated their previous forecast for corporate earnings at $224 a share, assuming that the economy avoids a recession in the second half of 2023.

The gains Goldman Sachs is predicting will partly be due to the boom in AI, which could boost productivity and juice corporate profits. Those benefits could take the stock market 14% higher, strategists said in a previous note. 

Meanwhile, there are promising indicators in the market that suggest more upside is on the way. S&P 500 breadth, a measure of the number of winning stocks in the market, is currently the most narrow since the pandemic’s tech bubble, largely due to significant gains tech stocks have made by jumping on the AI hype. 

But a small portion of winning stocks has typically led to a boost across the wider market, strategists said.

“Prior episodes of sharply narrowing breadth have been followed by a ‘catch up’ from broader valuation re-rating. The potential profit boost from AI has expanded the right tail for equities,” the bank said in a note on Friday, though it acknowledged risks from a potential recession and more hawkish monetary policy from the Fed. 

If the US does fall into recession, the S&P 500 could fall another 21% to 3,400, even lower than the most recent bottom around 3,600 in October. Meanwhile, corporate earnings could slip 10% to $200 a share, strategists estimated. 

Investors have been eyeing a potential recession over the past year, as central bankers raised interest rates to tame high inflation. Rates are now at their highest level since 2007. 

Goldman Sachs recently lowered its forecast for a recession hitting the economy in the next year to just 25% odds. That’s significantly lower than recession estimates from the New York Fed, which has priced in a 70% chance of a downturn by May 2024. 

There’s also the risk that rates keep moving higher, as prices in the economy still remain well-above the Fed’s 2% inflation target. While markets are expecting the Fed to pause rate hikes at its next policy meeting, investors are still pricing in a 63% chance the Fed could raise rates another 25 basis-points in July, per the CME FedWatch tool, further tightening financial conditions.