Wall Street's upbeat outlook on interest rate cuts is prompting more optimistic calls on stocks, too.

With inflation falling faster than many initially projected, the Federal Reserve taking a dovish turn, and bond yields sinking, Goldman Sachs now sees the S&P 500 (^GSPC) closing out 2024 at 5,100.

In its initial outlook released about a month ago, Goldman Sachs had projected the benchmark index to end the year at 4,700, which at the time had reflected about 5% upside for stocks in the next year.

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In the updated forecast, the firm specifically cited recent economic data that included softer-than-expected inflation for producers and better-than-expected November retail sales numbers.

"Above-consensus retail sales growth further evidenced economic resilience, while lower-than-expected jobless claims affirmed that the labor market remains healthy," Goldman Sachs' equity strategy team led by David Kostin wrote in a research note over the weekend.

The S&P 500 recently surpassed Goldman's initial 2024 target, with the benchmark closing in on its record high of 4,796. The move comes as markets have moved up expectations for interest rate cuts significantly after the Fed added an interest rate cut to its forecast for next year.

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Last week, Goldman amped up its rate hike expectations, projecting the first cut to come in March. A month ago, it saw interest rate cuts beginning in the fourth quarter.

An earlier start to rate cuts would be a welcome sign for stocks with weaker balance sheets, per the equity strategy team.

"An environment of falling interest rates and improving economic growth expectations historically has been supportive for small-caps, which have recently traded at depressed valuations," Kostin's team wrote.

Goldman isn't the only firm expecting rate cuts will start in the first quarter of next year.

In new research released Monday, Bank of America now sees 100 basis points of interest rate cuts in 2024, reflecting a forecast for one more cut than previously projected. BofA now sees rate cuts starting in March, after previously seeing rate cuts beginning in June.

"Incoming data is signaling the US economy can enjoy both modest growth and disinflation simultaneously," BofA US economist Michael Gapen wrote in a note to clients.

Broadly, markets are placing a nearly 75% chance of a rate cut in March, per the CME FedWatch Tool. A month ago there had been just a 28% chance of cuts by March.

Josh Schafer is a Reporter for Yahoo Finance.

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