US Weekly Kickstart

Assessing the balance of risks following the 5% S&P 500 sell-off

The S&P 500 sold off by 5% during the past week, driven by both an unwind of elevated positioning and economic growth concerns. Within the equity market, Cyclicals have lagged Defensives by 9% and our Momentum factor has declined by 7%.
Our Sentiment Indicator stands at -0.4, substantially below the highs in late November but above levels that have historically signaled tactical upside as a result of depressed positioning. As a result, we believe an improvement in the US economic growth outlook will be required to fully reverse the recent equity market rotations. Next Friday's jobs report will be a key test. Policy signals that boost the growth outlook could also lift the market, but uncertainty remains high.
We revise our 2025 EPS growth forecast from 11% to 9% and maintain our 2026 growth forecast of 7%. The levels of our 2025 and 2026 EPS estimates remain unchanged at $268 and $288 following better-than-expected 2024 EPS growth but softer-than-expected economic data in 2025. The consensus bottom-up 2025 EPS estimate has been lowered by 1% since the start of the year but is now roughly in line with our top-down estimate. Elevated policy uncertainty creates risks in both directions around our forecast.
Looking further ahead, we maintain our year-end S&P 500 price target of 6500 (+9% from today). The equity market's pricing of the economic growth outlook is now in the ballpark of our economists' baseline economic growth forecasts, and the S&P 500 P/E of 21.5x is in line with our year-end S&P 500 P/E multiple forecast. We continue to expect equity returns will be more modest than last year and match the trajectory of earnings growth.
We continue to recommend investors own Health Care, which offers a defensive tilt and trades at historically low valuations despite outperforming the market by 7 pp YTD.

Conversations we are having with clients: The 5% S&P 500 drawdown

The S&P 500 sold off by 5% during the past week, eliminating the market's YTD gains. The equal-weight S&P 500 has returned 3% YTD. In our conversations, clients have asked about the reasons for the drawdown, which catalysts would cause the market to rebound, and the balance of risks along the path forward.

From a flows perspective, an unwind in positioning and popular trades has contributed to the market volatility. Our Sentiment Indicator, which combines 9 different measures of US equity positioning, has declined from +2.8 standard deviations in late November to +0.7 last week and -0.4 this week. The main drivers this week were declines in mutual fund and hedge fund length. Despite the large decline, however, the Sentiment Indicator remains above "trough" levels experienced during past equity market corrections, signaling that positioning is not yet depressed enough to argue for tactical upside without a clear catalyst.

Exhibit 1: Our Sentiment Indicator has declined to -0.4

1. Our Sentiment Indicator has declined to -0.4. Data available on request.

Source: Goldman Sachs Global Investment Research

The positioning unwind has led to a 5% sell-off in our long/short Momentum factor (GSMEFMOM) during the past week. The 5-day drawdown ranks as a 3rd percentile return relative to the past 10 years. At the moment, our Momentum factor is heavily tilted towards Financials and away from Consumer Staples and Health Care.

The reversal has been especially painful for retail-exposed pockets of the equity market. Measures of retail trading activity have declined in recent weeks. Since the market peak on February 19, Bitcoin has declined by 12%, the Retail Sentiment basket (GSXUMEME) has dropped by 17%, and the non-profitable Tech basket (GSXUNPTC) has declined by 14%. The upcoming tax season risks extending the recent stretch of Momentum weakness, as investors sometimes sell shares in order to pay tax bills. During the past 20 years, our Momentum factor has posted its worst returns on average in April.

Exhibit 2: Performance of our Momentum factor

2. Performance of our Momentum factor. Data available on request.

Source: Goldman Sachs Global Investment Research

Exhibit 3: Our Momentum factor has sold off sharply

3. Our Momentum factor has sold off sharply. Data available on request.

Source: Goldman Sachs Global Investment Research

From a macroeconomic perspective, a downgrade in equity investors' growth expectations has also contributed to the sell-off. Following Election Day, the US equity market sharply upgraded its economic growth expectations, with Cyclicals outperforming Defensives. However, growth concerns have mounted given weakness in recent US economic data, including retail sales, consumer sentiment, and housing activity, as well as concerns about potential headwinds from elevated policy uncertainty. Since late January, Cyclicals have lagged Defensives by 9 pp and the pair is now back in line with pre-Election Day levels. The nominal 10-year US Treasury yield has declined by 36 bp at the same time. The equity market now appears to be pricing forward real GDP growth of roughly 2.5%-3%, closer to our economists' forecast of around 2% growth in 2025.

Exhibit 4: Cyclicals have sharply underperformed Defensives in recent weeks

ticker: GSPUCYDE

4. Cyclicals have sharply underperformed Defensives in recent weeks. Data available on request.

Source: Goldman Sachs Global Investment Research

In the near term, we believe an improvement in the US economic growth outlook will be required to fully reverse the recent equity market weakness. During the 9 instances since 2021 where our Momentum factor has sold off by 5% or more in a 1-week period, subsequent S&P 500 returns were typically dependent on whether the market's pricing of economic growth improved or deteriorated. We expect growth data will again be key for the path of US equities and next Friday's jobs report will represent a major test. Consensus expects non-farm payroll growth of 160,000. A weaker-than-expected print would add to recent investor growth concerns, driving further index weakness and Cyclical underperformance. In contrast, stronger-than-expected job growth would help ease investor fears and reverse the recent unwinds. Alternatively, the equity market would benefit from policy signals that boost the growth outlook, but uncertainty remains high.

Exhibit 5: Previous sharp 1-week Momentum drawdowns

1-week declines in GSMEFMOM of 5%+, first observation in month to avoid overlapping episodes

5. Previous sharp 1-week Momentum drawdowns. Data available on request.

Source: Goldman Sachs Global Investment Research

Looking further ahead, we maintain our year-end S&P 500 price target of 6500 (+9%). The market appears to be pricing a macroeconomic outlook roughly in line with our baseline forecasts. Similarly, the S&P 500 P/E of 21.5x is in line with our year-end S&P 500 P/E multiple forecast. We continue to expect ongoing earnings growth will determine the trajectory of US equity returns.

Exhibit 6: The S&P 500 P/E multiple is roughly in line with macro-implied fair value

6. The S&P 500 P/E multiple is roughly in line with macro-implied fair value. Data available on request.

Source: FactSet, Goldman Sachs Global Investment Research

We trim our 2025 EPS growth forecast from 11% to 9% and maintain our 2026 forecast of 7%. The levels of our 2025 and 2026 EPS estimates remain unchanged at $268 and $288. Our revision reflects the fact that EPS growth in 2024 was stronger than expected but economic data in 2025 have been softer than expected. S&P 500 EPS grew by 10% in 2024 to $246, surpassing our estimate of 8% growth. All else equal, the 2024 EPS beat and our 2025 EPS growth forecast would have implied higher levels of earnings in 2025 and 2026. However, economic data in 2025 have been slightly weaker and the tariff outlook slightly more hawkish than we expected.

Real GDP growth of roughly 2% in 2025 and 2026 should drive continued earnings growth, albeit growth that is no longer accelerating. Our economists' 1Q real US GDP growth tracker has declined from 2.6% at the start of February to just 1.4% today. Economic policy uncertainty, especially related to tariffs, has increased sharply since Election Day, and this uncertainty has fed into various business and consumer surveys. The combination of policy uncertainty and recent economic data surprises create risks in both directions around our forecasts.

Exhibit 7: Economic growth is the primary driver of S&P 500 EPS growth

annual data since 1990

7. Economic growth is the primary driver of S&P 500 EPS growth. Data available on request.

Source: Goldman Sachs Global Investment Research

Consensus 2025 EPS growth expectations have declined but are now roughly in line with our top-down estimates. While 4Q earnings season delivered strong trailing results, the outlook for forward earnings has weakened. Consensus bottom-up 2025 EPS growth expectations had been roughly stable during 2024 but have been lowered to 10% today from 13% at the start of the year. The downgrade has been driven primarily by weaker margin expectations (roughly 80% of the YTD revision in 2025 EPS ex-Financials and Utilities) rather than sales (20% of total). Negative EPS growth revisions have been heavily concentrated in cyclical sectors, including Materials, Energy, and Industrials. Our estimates are below consensus in 2026, driven primarily by more conservative margin assumptions.

Exhibit 8: Consensus 2025 EPS growth estimates have come down recently

8. Consensus 2025 EPS growth estimates have come down recently. Data available on request.

Source: FactSet, Goldman Sachs Global Investment Research

Exhibit 9: Cyclicals have had the most negative EPS revisions

9. Cyclicals have had the most negative EPS revisions. Data available on request.

Source: FactSet, Goldman Sachs Global Investment Research

EPS revisions for the Magnificent 7 technology stocks, a key source of support for aggregate EPS estimates in 2024, have also stalled. Consensus 2025 EPS estimates have risen by 18% since the start of last year, compared with a 5% decrease for the S&P 493. But Magnificent 7 estimates have been unchanged since November. During the 4Q earnings season, the aggregate Magnificent 7 sales and EPS surprises equaled 0% and 7%, respectively. Continuing this pattern, this past week NVDA registered its smallest revenue beat relative to consensus expectations since late 2022, before the release of ChatGPT.

Exhibit 10: Positive Magnificent 7 EPS revisions have stalled

10. Positive Magnificent 7 EPS revisions have stalled. Data available on request.

Source: FactSet, Goldman Sachs Global Investment Research

Exhibit 11: The magnitude of NVDA sales surprises has diminished

11. The magnitude of NVDA sales surprises has diminished. Data available on request.

Source: FactSet, Goldman Sachs Global Investment Research

By themselves, recent negative EPS revisions are not a particularly bearish signal because analysts typically revise estimates lower throughout the course of the year. The aggregation of analyst EPS estimates is almost always too optimistic initially. Bottom-up consensus EPS estimates have been reduced by an average of -4% each year since 1985. On net, consensus 2025 EPS revisions have still been less negative than the historical pattern, and earnings revision breadth (Exhibit 32) has recently improved after dipping to the lowest level in two years.

Exhibit 12: Path of consensus EPS estimates

12. Path of consensus EPS estimates. Data available on request.

Source: FactSet, Goldman Sachs Global Investment Research

Within the equity market, we continue to recommend investors own the Health Care sector, which offers investors a defensive tilt at low valuations. Health Care has outperformed the S&P 500 by 7 pp YTD (+7% vs. 0%) but the median stock still trades at an 18% P/E discount to the S&P 500, nearly the largest valuation discount in recent decades.

Exhibit 13: Absolute and relative sector valuations

13. Absolute and relative sector valuations. Data available on request.

Source: Goldman Sachs Global Investment Research

Exhibit 14 contains a screen of 41 Health Care stocks that have outperformed the median S&P 500 stock since the February 19th S&P 500 peak. The median stock in the lists trades at a 20% P/E discount to the median S&P 500 stock (15x vs. 19x).

Exhibit 14: S&P 500 Health Care stocks that have outperformed the median S&P 500 stock since the Feb. 19 peak

14. S&P 500 Health Care stocks that have outperformed the median S&P 500 stock since the Feb. 19 peak. Data available on request.

Source: FactSet, Goldman Sachs Global Investment Research

S&P 500 earnings and return forecasts

Pricing as of February 27, 2025, unless otherwise noted.

Exhibit 15: Goldman Sachs top-down S&P 500 forecasts

15. Goldman Sachs top-down S&P 500 forecasts. Data available on request.

Source: FactSet, Goldman Sachs Global Investment Research

Exhibit 16: Goldman Sachs and consensus forecasts for S&P 500 earnings and returns

16. Goldman Sachs and consensus forecasts for S&P 500 earnings and returns. Data available on request.

Source: Bloomberg, FactSet, Goldman Sachs Global Investment Research

Biggest stock movers this week

Exhibit 17: S&P 500 stocks with the largest moves this week

as of February 28, 2025

17. S&P 500 stocks with the largest moves this week. Data available on request.

Source: FactSet, Goldman Sachs Global Investment Research

Sentiment and flows

Exhibit 18: GS US Equity Sentiment Indicator of investor positioning

18. GS US Equity Sentiment Indicator of investor positioning. Data available on request.

The Sentiment Indicator combines 9 measures of positioning across institutional, retail, and foreign investors and has historically been a statistically significant signal for near-term S&P 500 returns.

Source: Goldman Sachs Global Investment Research

Exhibit 19: Recent mutual fund and ETF flows

19. Recent mutual fund and ETF flows. Data available on request.

Source: EPFR, Goldman Sachs Global Investment Research

Economic growth

Exhibit 20: US equity market internal pricing of economic growth

Cyclicals basket excludes commodity sectors; ticker: GSPUCYDE Index

Source: Atlanta Fed, Goldman Sachs Global Investment Research

Exhibit 21: Goldman Sachs and consensus forecasts for US real GDP growth

21. Goldman Sachs and consensus forecasts for US real GDP growth. Data available on request.

Source: Bloomberg, Goldman Sachs Global Investment Research

Interest rates and financial conditions

Exhibit 22: Market pricing of near-term and long-term interest rate outlook

22. Market pricing of near-term and long-term interest rate outlook. Data available on request.

Source: Goldman Sachs Global Investment Research

Exhibit 23: Goldman Sachs Financial Conditions Index

23. Goldman Sachs Financial Conditions Index. Data available on request.

Source: Goldman Sachs Global Investment Research

Market breadth and concentration

Exhibit 24: S&P 500 52-week market breadth

24. S&P 500 52-week market breadth. Data available on request.

Market breadth calculated as the difference between the distance of the aggregate S&P 500 Index from its 52-week high and the distance of the median S&P 500 constituent from its 52-week high. When the aggregate index is much closer to its 52-week high than is the median stock, market breadth is narrow.

Source: Goldman Sachs Global Investment Research

Exhibit 25: Concentration of S&P 500 market cap and earnings in the 10 largest index constituents

25. Concentration of S&P 500 market cap and earnings in the 10 largest index constituents. Data available on request.

Earnings reflect consensus forward 12-month estimates.

Source: Compustat, IBES, FactSet, Goldman Sachs Global Investment Research

Correlation and volatility

Exhibit 26: S&P 500 realized average stock correlation

26. S&P 500 realized average stock correlation. Data available on request.

Source: Goldman Sachs Global Investment Research

Exhibit 27: S&P 500 implied volatility

27. S&P 500 implied volatility. Data available on request.

Source: Goldman Sachs Global Investment Research

IPO Barometer and mutual fund performance

Exhibit 28: Goldman Sachs IPO Barometer

28. Goldman Sachs IPO Barometer. Data available on request.

The Goldman Sachs IPO Barometer combines five indicators that gauge the conduciveness of the macro environment to IPO activity.

Source: Goldman Sachs Global Investment Research

Exhibit 29: US equity mutual fund returns relative to benchmarks

29. US equity mutual fund returns relative to benchmarks. Data available on request.

Source: FactSet, Goldman Sachs Global Investment Research

Earnings growth

Exhibit 30: Realized and consensus EPS growth for select US equity indices

30. Realized and consensus EPS growth for select US equity indices. Data available on request.

Source: FactSet, Goldman Sachs Global Investment Research

Exhibit 31: Realized and consensus year/year S&P 500 EPS growth

31. Realized and consensus year/year S&P 500 EPS growth. Data available on request.

Source: FactSet, Goldman Sachs Global Investment Research

Exhibit 32: S&P 500 FY2 earnings revision breadth

32. S&P 500 FY2 earnings revision breadth. Data available on request.

Revision breadth calculated as [(# of companies with positive EPS revisions)-(# of companies with negative revisions)]/(total # of companies). Revisions reflect FY2 EPS estimate changes during a rolling 1-month window.

Source: FactSet, Goldman Sachs Global Investment Research

Valuations

Exhibit 33: US equity index P/E valuations vs. history

Source: Compustat, FactSet, IBES, Goldman Sachs Global Investment Research

Exhibit 34: S&P 500 consensus forward 12-month P/E

34. S&P 500 consensus forward 12-month P/E. Data available on request.

Source: Compustat, FactSet, IBES, Goldman Sachs Global Investment Research

Exhibit 35: S&P 500 valuation relative to US Treasury yields

35. S&P 500 valuation relative to US Treasury yields. Data available on request.

Equity risk premium calculated by solving for the discount rate that equates the fair value of our multi-stage S&P 500 dividend discount model to the current market price and subtracting the 10-year US Treasury yield.

Source: Goldman Sachs Global Investment Research

YTD absolute and risk-adjusted returns

Exhibit 36: YTD asset returns and return/volatility ratios

36. YTD asset returns and return/volatility ratios. Data available on request.

Crude oil represents S&P GSCI Crude Oil Index.

Source: FactSet, Haver Analytics, Goldman Sachs Global Investment Research

Sector returns, earnings, and valuations

Exhibit 37: Sector and industry group returns

37. Sector and industry group returns. Data available on request.

Source: FactSet, Goldman Sachs Global Investment Research

Exhibit 38: Earnings contributions and growth by S&P 500 sector

38. Earnings contributions and growth by S&P 500 sector. Data available on request.

Source: FactSet, Goldman Sachs Global Investment Research

Exhibit 39: S&P 500 sector P/E valuations relative to history

39. S&P 500 sector P/E valuations relative to history. Data available on request.

Source: Compustat, FactSet, IBES, Goldman Sachs Global Investment Research

Thematic baskets

Exhibit 40: Recent performance of select Goldman Sachs Research baskets

basket returns expressed relative to the equal-weight S&P 500 except for long/short basket pairs as noted

40. Recent performance of select Goldman Sachs Research baskets. Data available on request.

Basket returns and constituents can be accessed via GS Marquee or Bloomberg using the indicated tickers.

Source: Goldman Sachs Global Investment Research

Factors

Exhibit 41: Indexed return of select equity factors

Factor performance and constituents can be viewed on GS Marquee or Bloomberg using the tickers indicated on the chart.

Source: Goldman Sachs Global Investment Research

Exhibit 42: Equity factor valuations relative to history

42. Equity factor valuations relative to history. Data available on request.

Source: Goldman Sachs Global Investment Research

Goldman Sachs global macro research cross-asset forecasts

Exhibit 43: Goldman Sachs macro research asset forecasts

43. Goldman Sachs macro research asset forecasts. Data available on request.

Source: FactSet, Goldman Sachs Global Investment Research

Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html.