The S&P 500 could jump 8% in the next year as stocks avoid a bear market and falling bond yields boost gains, Goldman Sachs says

• Goldman Sachs expects stocks to avoid a bear market in 2024 while the US economy skirts a recession.
• Falling bond yields will open the door to further upside for equities. 
• At the same time, Goldman cautioned that yields remaining higher is a risk for stocks next year. 

Goldman Sachs has a mostly upbeat outlook for markets and the economy in the coming year, telling investors that stocks are likely to avoid a bear market while the US economy also sidesteps a recession in the coming 12 months. 

In its 2024 market outlook, Goldman Sachs analysts said the S&P 500 could hit 4,700, about 8% higher from Friday's closing price. Strategists described equities since 2022 as stuck in a "Fat & Flat" range, meaning that markets have swung wildly but ultimately have ended up in roughly the same place in that timeframe. 

"As higher-for-longer interest rates make valuation expansion from here difficult to justify, our market forecasts are broadly in line with earnings growth," the bank's strategists said Monday. "On a weighted basis, we expect 8% price returns and 10% total returns for Global equities over the next year, taking them towards the upper end of the Fat & Flat range that they have been in since 2022."

The firm's economists expect a soft landing for the US economy, and the downside risks for equities are moderating with disinflation looking to be still on track and bond yields declining from recent multi-year highs. 

While US equities remain vulnerable to rising real interest rates, an upbeat macro outlook should help support stocks and growth.

"In the absence of recession, corporate earnings rarely fall," Goldman strategists said. "Nevertheless, the lack of strong profit growth and a high starting valuation (particularly in the US equity market), and low equity risk premia (ERP) leaves an unexciting outlook overall on a risk-adjusted basis, relative to cash returns."

As far as sector performance in 2024, Goldman's view is that AI is not a bubble and profitable technology names will continue to prove their worth. 

"A barbell between defensive, strong balance sheet growth, and selected deep value, continues to be our favoured approach," the bank's researchers said.

In a separate note last week, Goldman strategists led by Jan Hatzius said they maintain a 15% recession probability for the year ahead, and that markets and the world economy are reverting to pre-2008 conditions as the era of ultra-low rates and ample liquidity ends. 

Broadly, they anticipate that real household income will grow, manufacturing activity will rebound, and central banks around the world will be increasingly open to rate cuts.

Part of that transition, which strategists dubbed the "Great Escape," is that the investing environment appears more normal than it has at any point since before the Great Financial Crisis.

"Real expected returns now look firmly positive," Hatzius said, pointing to the end of the post-crisis era and a normalization of interest rates and investment returns.