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.
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.
