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GOLDMAN SAYS EARNINGS GROWTH TO DRIVE STOCKS DESPITE HAWKISH FED RISKS

Earnings growth is likely to remain the primary driver of U.S. equities, even as a more hawkish Federal Reserve stance continues to pose a risk to stocks, Goldman Sachs analysts said.

Investors are focused on the start of the second-quarter earnings season on Tuesday and the release of June consumer price index (CPI) data, both of which could influence expectations for the Fed's next policy moves.

Goldman expects the Fed to leave interest rates unchanged this year, while assigning a 25% probability to a rate increase. Markets, however, are pricing in about 50 basis points of tightening through mid-2027.

A resumption of Fed rate hikes would likely weigh on stocks for three reasons, Goldman said. Higher rates would weaken the economic growth outlook, which has historically been more important for equity performance than interest rates.

The current AI-led investment cycle is also unusually capital-intensive, making companies more vulnerable to higher financing costs. In addition, previous Fed tightening cycles have often coincided with periods of weak equity returns.

Within the market, companies with weak balance sheets and large amounts of floating-rate debt are likely to remain particularly sensitive to changes in interest-rate expectations, Goldman said.

Among S&P 500 sectors, technology stocks have historically outperformed in the early stages of Fed tightening cycles, while financials have tended to lag.

"Regardless of whether or not the Fed hikes, uncertainty surrounding the path of Fed policy increases the risk of interest rate volatility that would also be a headwind for stocks," the analysts said.

(Chibuike Oguh)

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