A rosier outlook for the S&P 500

The UK needs a productivity boost # # --------------------------------------------------------------- The key takeaways today: - Forecast Change: The S&P 500 may rally higher than expected - How to boost the UK's stalled productivity - Why oil prices have stayed relatively stable - Gold prices are poised to rise as central banks buy more of the metal - February QuickPoll: Will inflation fall below 2% this year? - Briefings Brainteaser: Magnificent Seven, meet Europe's GRANOLAS Was this newsletter forwarded to you? [Sign up now](. --------------------------------------------------------------- Forecast Change: The S&P 500 will rally higher than expected Goldman Sachs Research raised its target for the S&P 500 Index for year-end 2024 from 5,100 to 5,200, representing a gain of 4% from the index's level on February 16. The higher forecast reflects Chief US Equity Strategist David Kostin's expectations for stronger economic growth and higher profits from the information technology and communication services sector. This sector is home to five of [the Magnificent Seven stocks]( — the tech companies accounting for about a third of the S&P 500's market capitalization. Our analysts forecast S&P 500 earnings per share of $241 in 2024 and $256 in 2025, up from $237 and $250 previously. The Magnificent Seven is estimated to have lifted margins in the fourth quarter by 582 basis points (year over year), leading to earnings growth of 58%. By contrast, margins for the remaining 493 stocks in the S&P 500 contracted by 56 basis points and earnings fell by 2% (the declines being driven primarily by energy stocks). For more on Kostin's outlook, listen to [The Markets podcast](. --------------------------------------------------------------- How high-productivity businesses can boost the UK economy The UK's 5.5 million small- and medium-size enterprises [could offer an answer to revving up the UK economy]( and reversing more than a decade of stalled productivity. Britain's lack of growth in worker efficiency is well documented. Since 2007, the increase in average annual productivity has languished at just 0.2%, compared to an average of 3.6% in the three decades following World War II. A survey of UK small business owners who participated in [the Goldman Sachs 10,000 Small Businesses (10KSB)]( program helps to lay out their views and asks on government policies, such as upskilling the workforce, that could improve worker efficiency and unlock £106 billion in private sector revenue and 88,000 new jobs. The survey is at the heart of [Generation Growth: The Small Business Manifesto]( which was produced by Goldman Sachs 10,000 Small Businesses. Some additional findings: - The respondents in the survey, overall, have a positive outlook. Some 68% say the UK is a good place to run a small business, and 90% or more expect to grow revenue and headcount in the next three years. - Even so, 55% also say they are unable to find the talent they need. Surprisingly, only 5% say they would prioritize coding, natural sciences, and engineering skills in prospective employees; 19% say they are looking for talent with basic IT skills (like proficiency in Microsoft Office) and accounting and presentation skills. - Many of these companies are contemplating an IPO. Around 58% say they would consider taking their companies public, and 44% say the UK is an attractive IPO market. - Three-quarters of the respondents believe there should be new financial incentives for small business to adopt AI technology, and 80% are either already using generative AI tools such as Chat GPT or plan to start doing so in the next 12 months. --------------------------------------------------------------- Shifting supply and demand dynamics are buffering the oil market Despite the rise in geopolitical tensions, oil prices have remained relatively stable. The reason has to do with fundamental shifts in supply-and-demand dynamics. The US, for one, is now producing as much oil as Russia and Saudi Arabia combined, says Daan Struyven, head of oil research, on [Goldman Sachs Exchanges](. “A bigger US oil sector gives us another buffer, another adjustment mechanism, to deal with supply disruptions, for instance, out of the Middle East,” he notes. In addition, “energy consumers and energy producers have drawn lessons from the energy crisis we had in the 1970s and 1980s, and actually, also from the energy crisis we had over the last couple of years,” Struyven says. Countries such as the US, Europe, and China have built buffers through strategic petroleum reserves, while also taking steps to reduce their reliance on oil by switching to electricity or driving more fuel-efficient cars, he says. Meanwhile, core OPEC producers, such as Saudi Arabia, are also focused on avoiding big price spikes for fear of hurting the long-term demand for OPEC oil, he adds. Daan Struyven (L) and Allison Nathan of Goldman Sachs Research While Struyven expects Brent oil prices per barrel to remain in the low-to-mid-$80s this year — as rising demand from emerging markets offsets increased supply from the US, Canada, Brazil, and Guyana — he says there is still a risk of price spikes from supply disruptions in the Middle East and Russia. “With consolidation in the US energy complex, US oil supply has become less price responsive because those big producers have their growth targets and are not going to massively ramp up their production in response to price spikes.” --------------------------------------------------------------- Gold prices are forecast to rise 6% in the next 12 months Gold prices are poised to rise as central banks purchase more of the precious metal and as strong retail demand in emerging markets bolsters prices, [according to Goldman Sachs Research](. The price of gold is forecast to climb about 6% in the next 12 months to $2,175 a troy ounce, Nicholas Snowdon, head of metals in Commodities Research, and analyst Lavinia Forcellese write in their team's report. They point out that gold prices may trade in a range in the near term, amid uncertainty about Federal Reserve interest-rate policy. (Gold, which doesn't offer yields, tends to be less attractive to investors when interest rates are higher.) The downside risks to gold prices are expected to be limited by several key factors. Central bank purchases are strong and geopolitical tensions are high. Central banks purchased an average of 1,060 tonnes from 2022 to 2023, compared to 509 tonnes purchased from 2016 to 2019. The increase comes as China shifts reserves away from US dollars and countries such as Poland increase their gold reserves. Investment demand for gold has yet to rebound. Historically, changes in exchange-traded fund holdings have tended to be triggered by major risk-off events (when the appetite for risk declines) and by cycles of easier monetary policy. Our analysts expect ETF holdings to climb once the Fed starts cutting rates, which our economists think could begin as early as May. Strong retail demand for gold could propel its price higher. The “wealth effect” of rising incomes in emerging markets is driving consumer demand for gold, especially in jewelry. “The rapidly growing cohort of [‘affluent' consumers in India]( drive growth in jewelry consumption,” our analysts write. In China, gold was one of the best-performing assets in 2023, driven by weak consumer confidence and concerns about growth that boosted demand for the "safe haven" of gold. --------------------------------------------------------------- February QuickPoll: Investors are still bullish on tech and US markets Investors remain bullish on risk assets, despite the Fed's hawkish pivot, a higher-than-expected inflation number, and weaker-than-expected retail sales data, according to the latest Marquee QuickPoll, which surveyed more than 800 institutional investors in early February. Key highlights include: Peak optimism. Investor optimism on risk assets reached its highest levels since 2021, with 44% of those surveyed describing themselves as bullish on risk assets. The biggest driver behind this view is the continued conviction of investors that the US will avoid a recession and that inflation will continue to fall. Indeed, almost half (49%) expect inflation to fall below 2% this year. Megacap tech. Investors believe that megacap tech has room to run. “While investors are looking to maintain their current long positions, not many are looking to add, signaling that we may be nearing a top,” says Goldman Sachs' Oscar Ostlund, global head of Content Strategy, Market Analytics, and Data Science. Favoring the US. Investors continue to favor US equities, with 40% of those surveyed saying they expect the S&P 500 index to be the best-performing major equity-market index this month. While investors expect US markets to outperform, investors also turned more favorable on Chinese equities, likely due to the government's equity-market rescue package, Ostlund notes. --------------------------------------------------------------- Briefings Brainteaser: Breakfast of champions The US stock market has the Magnificent Seven — the tech stocks that account for an outsized share of the S&P 500's market capitalization and recent price performance. Europe has the GRANOLAS: Goldman Sachs Research's acronym for 11 of Europe's largest listed companies. The GRANOLAS have kept pace with the Magnificent Seven over the past three years, returning about 60% since January 2021 (as of February 2024). What share of the STOXX 600 Index's market capitalization do the GRANOLAS account for? A) 10% B) 25% C) 35% D) 50% [Check the answer here](. --------------------------------------------------------------- Goldman Sachs in the news By clicking on these links, you will redirected to external websites that Goldman Sachs does not own or operate. Goldman Sachs is not responsible for the products, services, or content provided on those sites. Please refer to each external website's terms, privacy and security policies for details. [CNBC]( February 12 Goldman Sachs' Sara Naison-Tarajano: Expect five rate cuts in 2024 (3:59) [Bloomberg]( February 20 Goldman Sachs' Michelle Cheng on China's Lunar New Year consumption trends (8:38) [Axios]( February 21 Exclusive: Black women face barriers on path to generational wealth, survey shows [The Wall Street Journal]( February 22 Goldman Sachs' chief economist has nailed big calls. Here's his next one. --------------------------------------------------------------- --------------------------------------------------------------- Some of the images used in this newsletter are sourced via Getty Images. The opinions and views expressed in this newsletter may not necessarily reflect the institutional views of Goldman Sachs or its affiliates. The information provided in this newsletter is for informational purposes only and does not constitute a recommendation from any Goldman Sachs entity to the recipient. 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