- Goldman Sachs expects the S&P 500 to close the year 2% higher, but not before enduring an 18% plunge over the next three months.
- The stock market’s recent leap from late-March lows is best attributed to investors’ “fear of missing out,” the team of analysts led by David Kostin wrote Friday.
- The S&P 500’s lofty valuation faces several near-term threats before economic stabilization in the third-quarter pushes it higher, the firm added.
- Listed below are the six risks Goldman says investors are overlooking. The firm thinks these will be responsible for pushing US stocks lower over the next three months.
- Visit the Business Insider homepage for more stories.
The bank sees the benchmark index closing the year at 3,000 – roughly 2% higher than its Friday close of 2,930 – as the coronavirus threat fades and the economy rebounds. Yet Goldman’s forecast also reflects an 18% downside to its three-month target, with looming threats dragging the benchmark index to 2,400 by the end of the summer.
“A single catalyst may not spark a pullback, but a number of concerns and risks exist that we believe, and our client discussions confirm, investors are downplaying,” a team led by chief US equity strategist David Kostin wrote in a client note.
The stock market’s recent surge from late-March lows is best attributed to a “fear of missing out” attitude among investors, and skepticism surrounding the rally’s strength remains, Goldman added.
Listed below are the six risks Goldman says investors are overlooking. The firm thinks these will be responsible for pushing US stocks lower over the next three months as they become fully realized.
2. A lengthy reboot
David McNew/Getty Images
Goldman cited a recent call from IDEX Corp. while forecasting a drawn-out rebound. The manufacturing giant expects the US upswing will come with “fits and starts,” adding that expectations of a full recovery by the fall are “crazy talk.”
Data released Friday morning suggests the nation’s job market will post a similarly slow bounce-back. The Labor Department revealed nonfarm payrolls plummeted by 20.5 million in April, pushing the unemployment rate to 14.7%. With many major employers struggling to stay solvent, hiring likely won’t rebound in the near-term.
3. Swelling loan-loss protections
Spencer Platt/Getty Images
Major US banks sacrificed profits for loan-loss reserves in the first-quarter, shoring up cash to protect against souring debt. Reserves totaled $46 billion in the three-month period compared to $49 billion in all of 2019, according to Goldman, and defensive move assumed the unemployment rate would only rise to about 10%.
With the labor market taking a harder-than-expected hit, the analysts now see $115 billion in additional reserve bolstering over the next 12 months.
The move will likely force more companies to cancel stock repurchase programs. Goldman expects buybacks to shrink 50% this year, pulling back on the stock market’s biggest source of demand over the past decade.
5. The 2020 election
AP Photo/Julio Cortez
If the coronavirus pandemic and global oil-price conflict didn’t add enough volatility to the stock market, investors have the 2020 presidential election to look forward to. Goldman sees market focus shifting to the race in the third quarter as the economy stabilizes, and all eyes will be on how corporate tax policy could change in the wake of a Democratic Party victory.
The 2017 tax cut could be reversed if President Donald Trump leaves the White House, and corporate profits would significantly suffer for it. The analysts forecast the S&P 500’s earnings per share sliding by $19 next year if such a policy action is taken. The index’s price-earnings multiple would rise 15% from its “already stretched valuation,” Goldman added.