Goldman Sachs explains why stocks can keep rising, even as a record-sized recession beckons

• Markets may continue to look past negative coronavirus news, especially if projections continue to show that the economy is expected to rebound following the pandemic, according to a Monday note by Goldman Sachs.
• An analysis of GDP forecasts from the bank showed investors tend to discount the next two years of macroeconomic performance.
• Thus, metrics that focus only on growth over the next year "will overstate current valuations, given the large rebound expected beyond this year," wrote Zach Pandl, co-head of global FX and EM strategy, in a Monday note.
• Read more on Business Insider.

Markets may continue to look past negative coronavirus news, especially if projections continue to show that the economy is expected to rebound following the pandemic, according to Goldman Sachs.

An analysis by the bank using changes to gross domestic product forecasts shows that investors typically discount at least the next two years of macroeconomic performance, according to a Monday note.

That means that metrics that focus only on growth over the next year — such as multiples based on 12 month earnings expectations — "will overstate current valuations, given the large rebound expected beyond this year," wrote Zach Pandl, co-head of global FX and EM strategy, in the note.

While the coronavirus-induced recession is slated to be the deepest contraction in modern history, it's also likely to be the shortest, according to Pandl. Following a dip in 2020, many economists expect GDP to rebound in 2021 and 2022. By early April, consensus GDP forecasts incorporated a virus hit, down 4% this year. But, forecasts are for 4% growth in 2021 and 3% in 2022, an unusual pattern, said Pandl.

That means that more disappointing data over the near-term may not weigh heavily on markets, as activity is expected to snap back "relatively quickly," Pandl wrote. "The depth of the downturn matters much less than the duration of the recovery," he said.

Goldman's analysis comes amid a stock market recovery from March 23 lows. As states across the US begin to weigh relaxing and reversing strict lockdowns to curb the spread of COVID-19, stocks have slowly gained on the optimism that the economy will soon reopen. From March 23 through Monday's close, the S&P 500 has gained about 29%, but is down about 15% from all-time highs in February.

Still, many economists disagree that any rebound following the coronavirus pandemic will be a quick one. Instead of the sharp, "V-shaped" recovery that Goldman is suggesting, many expect that a rebound will take a softer "U" shape.

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