another 12% decline in SPX remains on the table

The S&P 500 index has had a rough start to the year, down 7.0% YTD at present, and Goldman Sachs warns the macroeconomic headwinds could fuel another 12% decline in the benchmark from here.

What could lead to such a sharp descent?

U.S. inflation climbed to 7.5% in January that had Goldman Sachs’ David Kostin call for seven rate hikes in 2022.

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In a recent note, however, the Chief U.S. Equity Strategist at the Wall Street bank cautioned that the SPX could tank to 3,900 if inflation continues to run hotter-than-expected, urging the U.S. Fed to take an even aggressive stance in raising rates.

The rising tensions between the United States and Russia, concerning the latter’s invasion of Ukraine, are among other headwinds that could weigh on U.S. stocks, as per Kostin. Also on Tuesday, the U.S. Bureau of Labour Statistics said the producer price index jumped 1.0% in January – beating expectations by a big margin.

Kostin trimmed his year-end target for SPX

A 12% decline in the S&P 500, however, is the analyst’s worst-case scenario. With the expected seven rate hikes, he forecasts the benchmark to end the year at 4,900 versus his earlier year-end target of 5,100.

The trimmed target represents an 11% upside from here but only 3.0% from where the index started the year 2022. Kostin expects the upside to be driven by strong economic growth, which will support corporate earnings. He wrote:

The macro backdrop this year is considerably more challenging than in 2021. However, we continue to expect that equity prices will rise alongside earnings and reach a new all-time high in 2022.

A day earlier, Edward Jones’ Mona Mahajan said investors should turn to value cyclicals and emerging markets to hedge against rising rates and inflation.