Over the weekend just passed, Goldman Sachs released three significant research report conclusions that are poised to be bullish for the U.S. and Chinese stock markets.

Firstly, its equity strategy team raised the year-end target for the S&P 500 index to 6,000 points, which represents a 4.3% increase from last Friday's closing, with a 12-month target raised to 6,300 points.

Secondly, its economic team lowered the probability of a U.S. recession in 2025 from 20% to 15%.

Thirdly, its Asia-Pacific strategy team upgraded the rating for Chinese stocks to "overweight" and expressed optimism about the potential for large-scale stimulus measures to boost valuations.

Ahead of the third-quarter earnings season, which is set to kick off with bank stocks like JPMorgan Chase and Wells Fargo leading the way, Goldman Sachs has raised its EPS earnings per share forecasts for the U.S. stock market for the next two years, but the economy remains key.

Let's start with the conclusion from Goldman Sachs' Chief U.S. Equity Strategist, David Kostin. He has raised the S&P 500 target for the next three months (by the end of 2024) from the previous 5,600 points to 6,000 points, and the 12-month target from the previous 6,000 points to 6,300 points.

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This week will see the start of the third-quarter earnings season, led by bank stocks such as JPMorgan Chase and Wells Fargo. Taking this opportunity, the renowned strategist has raised the EPS forecast for the S&P 500 index for 2025 from $256 (equivalent to a year-over-year increase of 6%) to $268 (a year-over-year increase of 11%), and the EPS forecast for 2026 has been raised to $288 (a year-over-year increase of 7%), while maintaining the long-standing EPS forecast for this year at $241 (a year-over-year increase of 8%):

On one hand, the aforementioned forward EPS forecasts reflect a stable macroeconomic outlook, with economic performance being the main variable in the model, explaining at least half of the fluctuations in the S&P 500 index's EPS growth.

At the same time, the upward revision of the EPS forecast for the S&P Information Technology sector for next year is related to the recovery of the semiconductor cycle, which could attribute 20% (or $7) of the S&P 500 index's EPS growth in 2025 to semiconductor stocks.

However, the benign macroeconomic outlook, characterized by GDP approaching trend growth and a tight labor market, also implies that companies' ability to expand profits is limited.Goldman Sachs' forecasts indicate that the S&P 500's price-to-earnings ratio will remain flat at 22 times by the end of 2024, and then slightly contract to 21 times within 12 months. However, if the economic growth outlook weakens, the S&P P/E ratio could retreat to 18 times, implying a 6% drop in the S&P 500 to 5,400 points.

Goldman Sachs has revised the probability of a U.S. recession in the next year back down to the long-term average of 15%, primarily due to the unexpectedly strong non-farm payrolls employment report in September.

This is followed by Goldman Sachs' Chief Economist Jan Hatzius revising the probability of a U.S. recession in the next 12 months back down to the long-term average of 15%, mainly due to the strong U.S. non-farm payrolls employment report released last Friday. After the sharp rise in the non-farm unemployment rate in June and July, he had raised the probability of a U.S. recession to 25% in August.

Their research report states, "The September employment report has redefined the narrative of the labor market," meaning that strong job growth and upward revisions for the previous months of July and August have temporarily alleviated concerns that labor demand might be too weak to prevent the unemployment rate from continuing to rise:

"Like many investors, we have been closely monitoring the competition between employment growth and labor supply growth recently.

We expect labor supply growth to slow significantly but remain at a high enough level, so that 150,000 to 180,000 new jobs per month are needed to stabilize the unemployment rate.

Although employment numbers have been volatile, we do not see a clear basis for further sustained negative revisions. Broader speaking, we believe there is no obvious reason for employment growth to be lackluster given the high level of job vacancies and solid GDP growth."

Based on this, Goldman Sachs' economic team said that the rebound in employment growth puts the Federal Reserve "currently" on track for a 25 basis point rate cut, expecting the FOMC to cut rates by 25 basis points at each meeting until the rate range is lowered to 3.25% to 3.50% by June 2025."If job growth remains robust and the unemployment rate does not rise further, then when to stop cutting interest rates and how quickly to reach the aforementioned rate targets may become topics of discussion in the Federal Reserve's framework review next year."

Goldman Sachs Upgrades China's Stock Market Rating to "Buy", Estimates a Significant Increase of 15% to 20%

Lastly, let's look at the forecast from Goldman Sachs' Asia-Pacific strategy team for China's stock market. They have upgraded the rating for Chinese stocks to "Buy," believing that "more substantial policy measures" and "a market background of previous overselling and underweight positions" are the two key factors driving the stock market's surge.

Moreover, Goldman Sachs believes that China's stock market still has room for further increases after a strong rebound, estimating a potential rise of 15% to 20%. However, it is still uncertain whether a structural bull market has begun, and the scale and details of fiscal policy responses have not yet been announced:

"Firstly, the valuation of China's stock market has recovered from an extremely low level of 8.4 times and is still below the mid-range level, which is 11.3 times the expected earnings, and also below the five-year average of 12.1 times. If policies are implemented to support the economy, there is potential for valuations to return to a normal average. From empirical research, we have noticed a good correlation between fiscal easing and the expansion of stock market valuations.

Secondly, our Dividend Discount Model (DDM) indicates that the implied cost of equity (ICOE) for the stock market has recently been at high levels, indicating market concerns about the risks of economic growth downturns. However, coordinated and strong policy measures, as well as signs of willingness to take more actions, have mitigated these risks and should lead to a decrease in ICOE, supporting the expectation of further valuation repair.

Thirdly, if the economy responds to policies as our economists predict, corporate earnings growth may improve compared to the current conservative forecasts. Improvements in corporate earnings also tend to support valuation expansion.

Lastly, the position in China's stock market is still relatively light and will improve as risk appetite increases. Although hedge funds have quickly increased their exposure to Chinese investments, they are still at the 55th percentile of the five-year range (note: a moderate level), while the peak exposure during China's economic reopening and stock market rebound in January 2023 was at the 91st percentile (indicating there is still room for improvement).

At the same time, as of the end of August, the weight of mutual funds' positions in China's stock market was '310 basis points underweight compared to the benchmark'. Onshore investors have also begun to increase margin financing from low levels, echoing the rise in risk appetite when policy support was in place in 2015."Please provide the text you would like me to translate into English.