Chief US Equity Strategist David Kostin on the market impact of recent policy updates

EPS Growth Forecast Adjustments

• Goldman Sachs U.S. equity strategist David Koston lowered the 2024 EPS growth forecast from 11% to 9%.
• The downward revision reflects a weaker economic outlook that offsets slightly better-than-anticipated fourth-quarter results.
• The 2025 EPS growth rate forecast remains unchanged at approximately 7%.
• The year-end S&P 500 target price is maintained at 6,500, representing roughly 11% upside from current levels.

Market Rotation and Strategic Positioning

• Market sentiment has shifted from "excitement" regarding regulatory and tax cuts post-election to "boredom" driven by trade policy uncertainty.
• Investor portfolios are rotating toward defensive sectors less sensitive to trade policy, specifically healthcare and consumer staples.
• Koston recommends companies with low earnings volatility over the last decade, citing the principle that "the opposite of love is not hate, it's indifference."
• Specific stock mentions include International Exchange (ICE), MSCI, Thermo Fisher, Agilent, and potentially Apple.

Tariff Impact Sensitivity Analysis

• Goldman Sachs models suggest that a 5 percentage point increase in tariffs (rising from 3% to 8%) would reduce earnings estimates by 1% to 2%.
• The primary impact of tariffs is expected to manifest in unit volume and margin compression rather than hiring freezes.
• The firm utilizes a sensitivity model for client discussions but has not officially revised forecasts due to the unpredictable timing and specifics of potential tariff imposition.

AI Investment Narrative Shift

• Portfolio manager focus has transitioned from AI infrastructure build-outs to companies utilizing AI to amplify revenue.
• Software sector companies, such as MongoDB, are highlighted for helping structure data to improve corporate utility and sales.

Macroeconomic Drivers and "American Exceptionalism"

• GDP growth is identified as the single most significant variable driving corporate sales and margins, outweighing interest rates and oil prices.
• U.S. equity market outperformance is attributed to a higher reinvestment rate of cash flow (40%) compared to the global average (26%).
• The "Magnificent Seven" exhibit a 56% reinvestment rate, prompting ongoing analysis regarding potential over-investment.

Forward-Looking Indicators

• A sustained U.S. stock market rally is contingent on evidence that current economic growth is durable despite recent weakening data.
• Koston expects the market to remain weak until growth data confirms the sustainability of the economic trajectory.