Goldman Sachs Group Inc. strategists lowered their forecast for U.S. stock returns this year as the prospect of more aggressive monetary tightening weighs on valuations.

The strategists cut their year-end target for the S&P 500 benchmark index to 4,900 points, down from 5,100 points previously. It compares with Friday’s close of 4,418.64.

The less optimistic outlook still implies 11% upside from current levels to fresh record highs, although the strategists cautioned that risks are skewed to the downside.

“The macro backdrop this year is considerably more challenging than in 2021,” wrote the team, led by David Kostin. “Uncertainty abounds regarding the path of inflation and Fed policy.”

U.S. stocks have started the year on the back foot as the Federal Reserve prepares to turn off the taps of abundant liquidity that fueled the ferocious post-pandemic rally.

Goldman Sees Fed Hiking Seven Times in 2022 Instead of Five

While Goldman’s team still expects S&P 500 earnings per share to grow by 8% year-on-year to $226, it said inflation surprising to the upside means valuations will adjust accordingly. Goldman economists this week forecast the Fed will raise rates by 25 basis points at each of the seven remaining meetings for 2022, rather than the five increases it had expected earlier.

While a solid earnings season is helping to alleviate some concerns over a less forgiving macroeconomic backdrop, equity markets have remained volatile, with a military standoff at Ukraine’s border further weighing on risk appetite.

If inflation remains high and prompts more Fed hikes than currently anticipated, the S&P 500 would decline by 12% to 3,900, or even slump to 3,600 if the tightening tips the economy into recession, Goldman’s strategists warned. By contrast, if inflation recedes faster and fewer hikes are needed, the benchmark would rally to 5,500 index points, according to their bullish scenario.

Goldman’s move follows a call by BNP Paribas this week to lower its year-end forecast for the S&P 500 to 4,900, citing increased margin pressure due to higher inflation and lower nominal growth.

The 4,900 target implies full-year returns of just 4% for U.S. equities, which is “modestly below the historical average,” according to Goldman’s note.