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Investing.com - With the first quarter of 2025 drawing to a close, the benchmark S&P 500 index is in line for its first quarterly decline since the third quarter of 2023. Goldman Sachs sees two key policy shifts at the start of April - the announcements of reciprocal tariffs and the tapering of Fed quantitative tightening.
U.S. President Donald Trump has indicated plans to announce additional tariffs on April 2nd, and Goldman says the risks lean towards a negative surprise on announcement day.
“Our forecast for 7% EPS growth in 2025 assumes that U.S. effective tariff rate increases this year by 10 pp to 13%, the highest rate since 1938. We estimate each 5 pp incremental increase in the effective tariff rate would weigh on S&P 500 EPS by roughly 1-2%,” analysts at Goldman Sachs. led by David Kostin, said, in a note dated March 28.
April will also mark a further slowing of the Federal Reserve’s balance sheet runoff, the investment bank noted, expecting QT – allowing bonds to mature without reinvesting the proceeds – to conclude at the end of 3Q 2025.
“While QT tapering should be an easing headwind for the equity risk premium, in our ERP model, growth expectations carry a signal three times as strong as the size of the Fed’s balance sheet. Our rates strategists expect the nominal 10-year US Treasury yield to end the year at 4.35%, similar to the current level,” Goldman said.
With these factors in mind, Goldman’s baseline forecast is the S&P 500 index’s return will be flat over the next three months, but rise by 11% through year-end as the economy and earnings continue to grow.
Adjustments to this growth outlook will be more important than changes in yields for the near-term path of equities. S&P 500 returns have typically been more sensitive to changes in the equity market pricing of economic growth than to changes in real yields, and that relationship has recently strengthened.
“In addition to tariffs, Friday’s employment report will represent a key signal for equity investors,” Goldman added.