A wave of favorable economic conditions should help the S&P 500 surge 15% by the end of next year, Goldman Sachs said Wednesday morning in a 39-page report outlining the firm’s outlook on everything from stocks and the economy to the Georgia Senate runoffs and monetary policy; these are some of the highlights.
Goldman expects Pfizer’s coronavirus vaccine candidate—and perhaps a few others in the pipeline—to receive emergency authorization from the FDA by January, with enough doses available to vaccinate the U.S. population in the first half of next year.
That development is key to the economy’s expected v-shaped recovery, which Goldman analysts said should continue in 2021 with estimated GDP growth of 5.3%, compared to a predicted loss of 3.9% this year.
S&P 500 earnings could also rebound sharply next year, growing 29% (after tanking an estimated 17% this year), Goldman estimates, citing “extremely positive” analyst sentiment.
Goldman forecasts the Federal Reserve won’t raise interest rates again until 2025—a move that encourages economic activity by keeping borrowing costs low, but heightens the systemic risks associated with massive personal, corporate and government debt loads.
The firm also believes Republicans will retain majority control of the Senate after the two Georgia runoffs in January, making it so that policy uncertainty declines amid likely gridlock—something experts say is the best-case election outcome for stocks.
Meanwhile, the bank’s strategists believe the U.S. dollar is in a “structural downtrend” and estimate it could shed 6% of its value next year, relative to foreign currencies–which should help (perhaps counterintuitively) bolster earnings, particularly for international-facing corporations.
The stock market’s resilience throughout the pandemic and a divisive U.S. presidential campaign has been “remarkable,” the team of Goldman analysts—led by David J. Kostin—said Wednesday morning. “The vaccine announcement by Pfizer provided evidence that a path to normalization exists, and that should serve as a catalyst for value stock outperformance.” Growth stocks should also remain attractive, they conclude, noting that the historical slowdown in economic growth and low-interest-rate environment that have supported booming growth stocks (mostly in technology) over the past few years are unlikely to change dramatically anytime soon.
What We Don’t Know
With respect to its stock market outlook, Goldman says “the path of the virus and its effects on corporate earnings remain the biggest ‘known unknown’ risks,” but despite positive results from candidate trials, “uncertainty remains regarding the safety, distribution and uptake of a vaccine—as well as its eventual impact on economic activity.” In its Financial Stability Report released on Monday, the Fed said that while “prompt and forceful policy responses”—including fiscal stimulus and lower interest rates—have propped up a better-than-expected economic recovery, “investor risk sentiment could shift swiftly” if the virus isn’t contained and no further government relief is provided, especially in sectors like energy, hospitality and travel that are still very sensitive to negative Covid developments.
What To Watch For
Inflation and interest rates pose a key risk going forward, Goldman said Wednesday, pointing to sky-high stock valuations that have been propped up by the “current extraordinary degree” of support from the Federal Reserve keeping interest rates at historic lows that are now predicted to continue through 2025.
Despite a surging stock market, key economic indicators like the labor market are still well below prepandemic levels—something Goldman notes in its Wednesday reports, and an ongoing surge in coronavirus cases domestically threatens to further dampen recovery prospects. “The next six months are going to continue to be pretty choppy,” Federal Reserve President Eric Rosengren said of the economic recovery on Tuesday. “I hope that we still get a fiscal package—it’s probably not going to come as soon as we were hoping and that does mean that we’re not going to get as robust a growth over the next couple of quarters as we were hoping.”
Stocks Up Again As Vaccine Rally Continues For A Third Day, But Uncertainty Lies Ahead (Forbes)
Senate Republicans Release $1.4 Trillion Spending Plan—Without Covid-19 Relief—Ahead Of December 11 Government Shutdown Deadline (Forbes)
Goldman Sachs Predicts A V-Shaped Recovery And A $1 Trillion Stimulus Package Before Biden Inauguration (Forbes)