The recent surge in U.S. stocks is poised to continue, buoyed by a resilient economic outlook and the potential for small-cap stocks to catch up, as indicated by strategists at Goldman Sachs Group Inc. The team, led by David Kostin, highlighted that while certain stocks have powered the recent gains, many in the S&P 500 Index remain significantly undervalued, with the median stock still 11% below its 52-week high.
Expectations of Federal Reserve interest-rate cuts and a rebound in corporate earnings are expected to enhance the prospects for a broader market rally, particularly in smaller stocks that have lagged behind during the current upswing. Kostin pointed out that the narrow breadth of the market indicates ample opportunity for catch-up trades.
Despite the ongoing market volatility influenced by U.S. trade policy, Kostin affirmed his bullish stance, reiterating a year-end target for the S&P 500 of 6,600 points, suggesting a possible 2% increase from current levels by the end of the year, with an anticipated climb of 6% by mid-2026.
US stocks reached new all-time highs last week, propelled by optimism surrounding economic growth and anticipated rate cuts from the Federal Reserve. The technology sector, particularly influenced by excitement around artificial intelligence, has been a significant contributor to this momentum. However, the release of a weaker-than-expected jobs report raised concerns among investors about the timing of the Fed’s response in reducing borrowing costs. According to RBC Capital Markets strategist Lori Calvasina, this softer data introduces uncertainty in a market that appears to be “priced for perfection.”
Nevertheless, Kostin noted that historical patterns suggest Fed rate cuts during a growth-oriented economy typically lead to increased S&P 500 gains. He pointed to the recent outperformance of the Russell 2000 index, which focuses on small-cap stocks, as evidence of an ongoing rotation in the market.
While Kostin believes small-cap stocks have room to perform better in the short term, he does not foresee this trend continuing over the next 12 months. Similarly, Morgan Stanley strategist Michael Wilson also anticipates additional gains in U.S. equities, albeit possibly amidst a more volatile environment. Wilson underscored the ongoing transition of the U.S. economy into an “early cycle” phase, which he believes will support a durable and widespread recovery in earnings across the market.
