The S&P 500 Is Projected to Rally More Than Expected

US stocks may rally more than previously forecast as the Federal Reserve is projected to cut rates earlier than expected, according to Goldman Sachs Research.  

The S&P 500 Index is forecast to rise 6% to 6,600 (up from a previous forecast of 6,100) in the next six months and 11% to 6,900 (up from 6,500) in the next 12 months, David Kostin, chief US equity strategist in Goldman Sachs Research, writes in the team’s report dated July 7. 

The forecast change reflects our economists’ projections of earlier and deeper rate easing from the Fed and projections for lower bond yields, continued strength in the largest stocks, and investors’ willingness to tolerate likely near-term weakness in company earnings.  

“In addition to the improved outlook for interest rates, the strength of first quarter earnings results boosted our confidence that the largest stocks will sustain current investor expectations for their long-term growth for at least the next few quarters, helping support valuation for the aggregate S&P 500 index,” Kostin writes. 

What’s the outlook for the US stock market? 

Goldman Sachs Research’s projection for lower 10-year Treasury yields is expected to boost the stock market: In the team’s macro valuation model, every 50 basis-point decline in real bond yields is associated with a roughly 3% increase in S&P 500 forward P/E, all else being equal.  

The research team raised its estimate for S&P 500 price/earnings (P/E), a measure of how much investors are prepared to pay per dollar of a company’s earnings, to 22x (from 20.4x).  

Shifting trade policy creates significant uncertainty around company earnings forecasts. Kostin’s team maintained its projection for the growth in S&P 500 stocks’ earnings-per-share at 7% in 2025 and 7% the following year. 

“Recent inflation data and corporate surveys indicate less tariff pass-through so far than we expected,” Kostin writes. But he adds that the effects of tariffs may take time to show up, and large companies appear to have some spare inventory in anticipation of higher tariff rates. 

For example, the median S&P 500 company in a goods-related industry entered the second quarter of 2025 with above-average days of inventory totalling roughly three months. 

“Recent company commentary shows S&P 500 firms plan to use a combination of cost savings, supplier adjustments, and pricing to offset the impact of tariffs,” Kostin writes.

How likely is a downturn in US stocks? 

The S&P 500’s 25% rally since April was one of the sharpest climbs outside of a recession in 20 years. But “the next few months for the equity market will look very different from the last,” Kostin writes. 

Although the S&P 500 has reached record highs, the median stock within the index is more than 10% below its 52-week high. This has lowered market breadth—a measure of how widely a market’s performance is reflected by its constituents—to its lowest level since 2023, according to Goldman Sachs Research’s market breadth indicator. 

In the past, sharp declines in market breadth have often signaled below-average returns and larger-than-average drawdowns ahead. 

“Extremely narrow breadth makes it likely that the next few months will be characterized by either a ‘catch down’ by the recent market leaders or a ‘catch up’ by recent laggards,” Kostin writes. 

The resilient outlook for earnings growth in 2026, the prospect of interest rate cuts resuming, and neutral investor positioning all support the possibility that the market will continue to climb as the recent narrow rally broadens to the rest of the index. 

Further stock market growth is also consistent with what has happened historically in comparable periods when the Fed resumes cutting. During the last 40 years there have been eight episodes in which the Fed cut after keeping interest rates on hold for six months or more. Although the S&P 500 generated a median six-month return of just 2% across all eight of these episodes, it rose by a median of 7% the four times when the economy continued to grow. 

On the other hand, a “catch down” outcome, where the narrow breadth of the index is resolved with a stock market decline, would be most likely if the outlook for corporate earnings worsened—particularly for the largest stocks. 

Which stocks are positioned to outperform in the second half of 2025?

Going into the second half of the year, Goldman Sachs Research recommends a portfolio with a largely balanced allocation among sectors and an overweight allocation to software and services; materials; utilities; media and entertainment; and real estate. There could also be opportunities for investors in alternative asset managers, which have lagged their macro-implied returns despite an improving backdrop for capital markets.  

And companies with a high share of floating rate debt should benefit as Fed rate cuts reduce pressure on their balance sheets and earnings. The team estimates that every 100 basis-point decline in bond yields would boost these companies’ earnings by slightly more than 5%. 

At the same time, although Goldman Sachs Research expects the market rally to broaden during the next few months, the team believes there is limited scope for small-caps and other “lower quality” stocks to consistently outperform, Kostin writes. 

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