Undeterred by the coronavirus outbreak that continues to wreak havoc on the global economy, top investment bank Goldman Sachs (NYSE: GS) today raised its year-end target level on the S&P 500. Goldman now believes the benchmark stock index (S&P 500) will hit 3,600 by the New Year, a substantial increase from the company’s previous estimate of 3,000. That 3,600 would represent growth of 6% over the current level.
The team of forecasters behind the new prognostication believes that investors will consider equities to be undervalued given a lower-than-expected risk premium.
In a research note, the Goldman team wrote that “[c]hanges in the [equity risk premium] are driven by many factors, including the strength of the economy today, the expected state of the economy going forward, and the confidence investors have in that forward path.”
Goldman’s analysts are anticipating that a coronavirus vaccine will be developed and approved by the end of this year, with wide distribution to occur shortly thereafter. Should that occur, Goldman’s estimate might prove to be modest; the potential impact of an effective vaccine could be profound, lifting stock indexes very much higher.
The stock market will begin the week from a height that is equal to where it stood before the pandemic. Peering ahead, Goldman Sachs strategists say there is an additional 7% in gains ahead this year for the S&P 500 index. In a weekend note, David Kostin and his colleagues raised their year-end 2020 target for the S&P 500 index to 3,600 from 3,000.
“Six months ago, on Feb. 19, the S&P 500 Index reached an all-time high of 3,386,” the Goldman analysts say. “Then, the coronavirus hit. The world stopped. Economies froze.”
But after a one-third drop in the stock market—and 750,000 global deaths from Covid-19—the S&P has fully recovered from its loss. There are 500 stocks in the index, but more than a quarter of its 51% rally was powered by just five stocks: Apple (ticker: AAPL), Microsoft (MSFT), Amazon.com (AMZN), Alphabet (GOOGL) and Facebook (FB).
Other drivers of the stock market recovery have been an outpouring of government spending and a Federal Reserve cut in interest rates to near zero.
Treasury rates will rise by year-end to 1.1%, according to Goldman economists, and to 1.4% by mid-2021. Yet corporate earnings will rise, too, and by more than generally expected. The Wall Street consensus for the S&P’s earnings in 2021 is $165 a share, Goldman says. But the economists forecast a 30% rise next year to $170, followed by an 11% rise in 2022. Driving those increases will be higher sales and profit margins in technology and health care.
On top of Goldman’s higher earnings expectations, the firm believes investors will pay a higher multiple for stocks. Before the pandemic, the S&P traded at 17 times expected 2021 earnings. Now, says Goldman, it goes for 20 times. By year-end, the analysts say the index will be trading at 21 times.
That is why they raised their year-end target for the S&P 500 to 3600.
The November election poses some risk to that target, Goldman warns. It says that prediction markets anticipate that Democrats will emerge in control of Washington, DC. That could result in higher corporate taxes. Other policy changes in fiscal spending and trade, however, could offset that damper.
And the biggest expected boost to the economy and the market, says Goldman, will be a vaccine that ends the pandemic. At least one vaccine will be approved by the end of 2020, with wide distribution by mid-2021.
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