The S&P 500 may rise less than expected as GDP growth slows

The recent fluctuations in the stock market have left many investors anxious, particularly regarding the S&P 500 index. Recent developments indicate that its performance may not meet earlier expectations, with a backdrop of slowing GDP growth contributing to this modified outlook. Understanding these dynamics is vital for anyone watching the stock market closely.

### What Caused the Stock Market to Drop?

Several factors have converged to prod the stock market into decline. One of the significant culprits identified is an increase in policy uncertainty. Much of this uncertainty is derived from ongoing discussions surrounding tariffs. Recent updates from Goldman Sachs Research have flagged an expected rise in the average U.S. tariff rate by approximately 10 percentage points, now anticipated to hover around 13%.

This increase in tariffs is expected to negatively affect corporate earnings. According to Goldman Sachs’ stock team, every five-percentage-point rise in the U.S. tariff rate could lead to a reduction in S&P 500 earnings per share by about 1-2%, assuming businesses can effectively pass on these costs to consumers. Given this context, concerns regarding the U.S. economic growth outlook have intensified. Weaker economic performance typically translates into diminished corporate earnings, a trend that is currently troubling many analysts.

Goldman Sachs Research also revised its GDP forecast for the United States, now projecting real GDP growth at just 1.7% year-on-year by the end of the 2025 financial year, down from a previous estimate of 2.2%. This lowered expectation has further compounded market pessimism.

Another urgent concern is the position unwinding taking place among hedge funds. A recent analysis from Goldman Sachs indicates that a selected basket of stocks, popular among these funds, has undergone its sharpest period of underperformance relative to the S&P 500 index in five years. The decline of more than 10% from the S&P 500’s record high in February this year is largely attributed to a selloff of large U.S. tech companies, often referred to as the “Magnificent Seven.” This concentration of losses in major stocks has sent shockwaves throughout the broader market.

### Which Stocks Should Investors Buy?

In light of these unfolding events, investors are naturally pivoting to strategies that can protect their portfolios. According to Goldman Sachs’ strategist David Kostin, one suggestion is to look for “insensitive” stocks that remain less affected by the significant market volatility stemming from economic fluctuations, trade risks, and advancements in artificial intelligence.

Investors could particularly focus on stocks with historically low sensitivity to changes in the equity market’s response to U.S. economic conditions. Moreover, Kostin advises considering stocks that have been adversely impacted by the recent selloff—especially those that have dropped over 15% from their peaks and currently trade at or below their three-year median price-to-earnings multiple. This strategy not only mitigates risk but could also position investors well for any potential recovery.

### Looking Ahead: What Needs to Change?

For the stock market to bounce back, a few key factors would need to come into play. First, there’s a need for improved outlooks concerning U.S. economic activity. Positive changes could stem from stronger economic data or more clarity surrounding tariff policies. Investors are reliant on a stable economic environment to regain confidence.

Second, equity valuations need to adjust. According to Goldman Sachs Research, current prices may be factoring in growth that is significantly lower than their baseline projections for U.S. economic activity. If investor sentiment shifts to reflect this discrepancy, it could invigorate stock prices.

Lastly, the overselling of equities may lead to investor positioning reaching depressed levels—a scenario often correlated with market rebounds. The historical tendency has shown that such positioning unwinds could offer favorable conditions for a market resurgence.

### Conclusion

Understanding the myriad factors contributing to a potential slowdown in the S&P 500 gives investors a clearer lens to navigate these uncertain times. As the economy’s growth trajectory appears less robust and concerns about tariffs loom large, analyzing both the immediate market dynamics and broader economic indicators will be crucial for making informed investment decisions.

While the outlook may appear daunting, this period also presents opportunities for discerning investors prepared to sift through market noise and capitalize on undervalued stocks. Amid uncertainty, strategic positioning and informed decision-making can arm investors against the unpredictability that defines today’s financial landscape.

Ultimately, the situation surrounding the S&P 500, coupled with evolving economic indicators, remains fluid. Staying updated and agile in response to these changes will be essential for anyone looking to thrive in the current market environment.

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