Over the past weekend, Goldman Sachs released three important research reports that are likely to be bullish for the US stocks and the Chinese stock market.

Firstly, its stock strategy team has raised the year-end target for the S&P 500 index to 6000 points, which represents a 4.3% increase from last Friday's close, with the future 12-month target being raised to 6300 points.

Secondly, its economic team has lowered the possibility of a recession in the US in 2025 from 20% to 15%. Thirdly, its AP strategic team has upgraded the rating of Chinese stocks to "shareholding" and is bullish on the potential boost in valuation from large-scale stimulus measures.

Ahead of the third-quarter earnings season, Goldman Sachs has raised its earnings per share (EPS) profit forecast for the US large cap stocks in the next two years, with the economy being key.

Let's start with the conclusion of David Kostin, Chief US Stock Strategist at Goldman Sachs. He has revised the S&P 500 target forecast for the next three months (until the end of 2024) from the previous 5600 points to 6000 points, and the 12-month target from the previous 6000 points to 6300 points.

This week will see the opening of the third-quarter earnings season led by banking stocks such as JPMorgan and Wells Fargo, as this renowned strategist takes the opportunity to raise the EPS profit forecast for the S&P large cap in 2025 from $256 (equivalent to a 6% year-on-year increase) to $268 (an 11% year-on-year increase), and raises the 2026 EPS forecast to $288 (a 7% year-on-year increase), while maintaining the long-standing EPS forecast for this year at $241 (an 8% year-on-year increase):

On one hand, the above long-term earnings forecasts reflect a stable macro outlook, with economic performance being a key variable in the model that can explain at least half of the fluctuations in the S&P large cap EPS growth.

At the same time, the upward revision of next year's s&p information technology sector EPS forecast is related to the semiconductor cycle recovery, which may attribute 20% (i.e. $7) of the 2025 s&p large cap EPS growth to semiconductor stocks.

However, the benign macroeconomic outlook characterized by the nearing trend growth rate of GDP and tight labor market also implies that the ability of enterprises to expand profits is limited.

Goldman Sachs's forecast indicates that by the end of 2024, the s&p large cap PE ratio will remain stable at 22 times, and then slightly contract to 21 times within 12 months. However, if the economic growth outlook weakens, the s&p PE ratio may fall to 18 times, resulting in a 6% decline to 5400 points for the s&p large cap.

Goldman Sachs has revised the probability of a US recession in the next year back to the long-term average of 15%, mainly due to unexpectedly strong non-farm payroll data in September.

Next, Goldman Sachs's Chief Economist Jan Hatzius re-adjusted the probability of a US recession in the next 12 months back to the long-term average of 15%, citing the strong US non-farm payroll report released last Friday. After a surge in non-farm unemployment rates in June and July, he had raised the US recession probability to 25% in August.

Their research report stated, "The September employment report has redefined the narrative of the labor market," meaning that the robust job growth and the upward revisions of the July and August data have temporarily relieved concerns about the labor demand possibly being too weak to prevent further rise in unemployment rates:

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

We expect labor supply growth to slow significantly, but will still remain at a sufficiently high level, so there is a need to add 0.15 million to 0.18 million new jobs per month to stabilize the unemployment rate.

Although employment numbers have been unstable, we have not seen a clear basis for further sustained negative revisions. More broadly, we believe that in a situation with high job vacancies and solid GDP growth, there is no obvious reason for employment growth to perform flatly.

Based on this, Goldman Sachs' economic team stated that the rebound in employment growth has put the Fed on track to reduce interest rates by 25 basis points "currently", with the FOMC expected to cut rates by 25 basis points in each consecutive meeting until June 2025, lowering the rate range to 3.25% to 3.50%:

"If employment growth remains robust and the unemployment rate no longer rises further, the timing of the interest rate cuts and how quickly to reach the above rate target may become topics of discussion in next year's Fed framework review."

Goldman Sachs upgraded its rating on the Chinese stock market to "shareholding", estimating a further significant upside of 15% to 20%.

Finally, looking at Goldman Sachs AP Strategic Team's forecast for the Chinese stock market, they raised the rating of Chinese stocks to "shareholding", believing that "catalysts of more substantial policy measures" and the market background of overselling and underholding before are the two key factors driving the sharp rise in the stock market.

Moreover, Goldman Sachs believes that the Chinese stock market still has further upside potential after a strong rebound, estimating a further 15% to 20% increase, but it cannot yet determine if a structural bull market has already begun, and the scale and details of fiscal policy response measures have not been announced:

"Firstly, the valuation of the Chinese stock market has rebounded from a very low level of 8.4 times, still below the mid-range level, the expected earnings of 11.3 times, and lower than the five-year average of 12.1 times. If policy support is in place to boost the economy, there is still potential for valuation to return to the normal average. From empirical research, we note that there is a good correlation between fiscal easing and stock market valuation expansion.

Secondly, our DDM model indicates that the implied cost of equity (ICOE) in the stock market has recently been at a high level, indicating market concerns about downside risks to economic growth. However, the coordination of strong policy measures, as well as signs of willingness to take more actions, have restrained this risk, which should lead to a decrease in ICOE, supporting expectations for further valuation repair.

Thirdly, if the economic response to policies is consistent with our economists' forecasts, corporate profit growth may improve more than the current conservative estimates. Improved corporate profits often support valuation expansion.

Finally, the positions in the Chinese stock market are still relatively light and are expected to improve as risk preferences increase. Although hedge funds have rapidly increased their exposure to Chinese investments, they are still at the 55th percentile in a five-year range (note: moderate level), while the peak exposure in January 2023, when the Chinese economy reopened and boosted the stock market rebound, was at the 91st percentile (indicating room for improvement).

As of the end of August,Mutual fundsThe overweight position in the Chinese stock market is 'underperforming the benchmark by 310 basis points.' Onshore investors have also begun to increase margin financing from a low level, echoing the rise in risk appetite during policy support in 2015.