Stock analysts at Goldman Sachs have boosted their forecasts for U.S. equities, driven by expectations of a sharp economic rebound in 2021 and a rollout by year’s end of a COVID-19 vaccine.
In a research note circulated to clients, Chief U.S. Equity Strategist David Kostin raised his fair-value year-end target for the S&P 500 stock index by 20 percent—from 3,000 points to 3,600. Widely viewed as a proxy for overall U.S. equities performance, the benchmark S&P 500 is made up of common stock issued by 500 large-cap companies.
Kostin referenced recent optimistic headlines around efforts to develop a COVID-19 vaccine, which Goldman analysts expect will translate into above-consensus earnings for S&P 500 listed companies. Another part of the stock market surge will also be powered by lower “equity risk premiums,” the Goldman strategist said.
“Looking forward, a falling equity risk premium will outweigh a rise in bond yields, and combined with our above-consensus EPS forecast, will lift the S&P 500 Index to 3,600 by year-end,” Kostin wrote.
Typically calculated as the difference in return between risky assets like stocks and risk-free investments like government bonds, equity risk premiums reflect a combination of expected economic growth and investor confidence.
“We may think of this measure as a relative value indicator between equities and government bonds. In my view, the equity premium exists because investors are structurally long non-diversifiable equity risk. US equities have cheapened versus government bonds compared to pre-COVID-19, which reflects the sharp drop in US yields,” explained Thomas Harr, Global Head of Fixed Income Research at Danske Bank, in an Aug. 16 research note (pdf).
The pandemic-driven crash in March sent the S&P 500 tumbling into a bear market while safe-haven assets like gold and bonds absorbed fleeing capital in a sharp risk-off episode. The yield on the benchmark U.S. 10-year Treasury note fell by over 60 percent from mid-February to mid-March. Bond yields move in the opposite direction to prices, with falling yields a classic indicator that worried investors are looking for a safe harbor in which to shelter their savings.
Yet with historic levels of fiscal and monetary stimulus, the S&P 500 has surged by over 50 percent off its March lows and seems poised to charge through its February all-time closing high.
“While near-term downside volatility may be likely, my base-case view is that we’re in an ongoing secular bull market,” said Nick Reece, senior analyst and portfolio manager at Merk Investments, in a statement to The Epoch Times. “The medium-term outlook continues to be supported by leading economic indicators, a high remaining wall-of-worry, high allocations to cash, and by revisions to earnings expectations.”
Battling the COVID-19 crisis, the Federal Reserve brought interest rates to near zero and deployed the full force of its crisis-era toolkit, including embarking on an asset-buying program of unprecedented proportions. As of Aug. 14, the Fed’s balance sheet stands at around $7 trillion, far eclipsing the “quantitative easing” stimulus of the Great Recession.
Congress, meanwhile, has since March approved around $3.6 trillion in new spending, with lawmakers and White House negotiators putting the final touches on the fifth stimulus package, expected to be worth at least $1 trillion.
While the 2020 election is a “significant risk” to Goldman’s forecast, the CCP (Chinese Communist Party) virus remains the chief worry.
“The largest risk to our forecast is the timing of a vaccine and path of recovery from the pandemic,” Kostin wrote, echoing recent remarks by Fed officials, who warned that any economic recovery will be fragile if the virus continues to pose significant threats to Americans’ health.