It’s not even the new year and Goldman Sachs has already lifted its S&P 500 target

“Decelerating inflation and Fed easing will keep real yields low and support a P/E [price/earnings] multiple greater than 19 times,” Kostin and his team told clients in a report that published late Friday.

Since late October, the S&P 500 and the Russell 2000
RUT
have gained a respective 15% and 23% as real rates have dropped to 1.7% from 2.5%, he noted. The bank’s prior 2024-end S&P 500 forecast assumed yields of 2.3% and a P/E of 18 times. The real rate is the nominal rate — what an investor gets from the 10-year U.S. treasury bond — minus inflation.

The new Goldman S&P 500 target puts it close to some of the most optimistic of Wall Street’s forecasters — strategists at Oppenheimer Asset Management and Fundstrat’s ever-bullish Tom Lee expect a rally to 5,200 by the end of next year.

The estimates from sell-side strategists put the average target for the S&P 500 at 4,902 for the end of 2024, so that Goldman may find itself in good company in coming months if stock-market momentum continues.

The optimism is not surprising given the index’s blockbuster 8.9% gain in November, and 3.3% rise seen in December thus far. Expectations for Fed easing have been a big driver for those gains, with the market now banking on more than 150 basis points of easing next year.

Read: The market is second-guessing its dovish reaction to Powell. This analyst says the Fed could slash rates by as much as 75%.

Kostin and his team sees upside potential to their earnings per share consensus of 5% growth, which they note is already higher than Wall Street consensus. “Equities were already pricing positive economic activity, but now reflect an even more robust outlook,” they said.

They said an improved macro outlook also implies a “more conducive environment” for getting initial public offerings to market during 2024.

And potential for more equity issuance in 2024 shouldn’t hold back stocks over the next 12 months, the Goldman strategists said. “We would expect that the lower cost of capital driving issuance would simultaneously boost buyback activity, helping offset the net effect on equity supply.”

Falling interest rates may also see investors shift some of their holdings toward stocks after $1.4 trillion has poured into money-market funds year to date versus just $95 billion for U.S. equity funds, said Goldman.

Looking ahead, the strategists said both improving growth and falling rates should help stocks with weaker balance sheets, notably those sensitive to economic growth. Lower rates are also historically supportive for small caps, they note.