Goldman Sachs says the S&P 500 could climb another 7% from current levels if a 'more optimistic US GDP forecast' plays out
- Goldman Sachs said in a note on Thursday that the S&P 500 could hit 3,600 if markets price in the bank's "comparatively more optimistic US GDP forecast."
- The bank's strategists Dominic Wilson and Vickie Chang said that if the economy contracted by only 5% in 2020 and grew by 6.2% next year, then real yields would rise sharply to levels of cyclical optimism in June.
- The US bank said in a note last week that banks were underpricing a scenario that a vaccine will be developed by the end of the year and widely distributed by the first quarter of 2021.
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The S&P 500 could hit 3,600 if markets price in a "comparatively more optimistic US GDP forecast," Goldman Sachs said this week. That's almost 7% above where the index traded on Friday.
In a note published Thursday, the strategists Dominic Wilson and Vickie Chang said that if the consensus forecast moved to its forecast of a 5% contraction in 2020 and 6.2% growth next year, then real yields would rise sharply back to levels that prevailed at the peak of cyclical optimism in June.
The bank said it used a US growth factor that saw a sharp upgrade during the early stages of reopening but "reversed that earlier upgrade" as more COVID-19 outbreaks hit the country.
"Our US growth factor essentially stabilized at lower levels in late June, around the time that the worst-affected US states implemented more serious measures to control the virus spread," the bank said. "Over the last two weeks, our US growth factor has picked up quite sharply again and is now back around the highs that prevailed at the start of June."
Goldman Sachs echoed its comments last week that markets were underpricing the possibility that a vaccine will be produced by end of this year and widely distributed by the second quarter of 2020.
Expectations that a vaccine will be developed sooner than expected also prompted the bank to raise its US GDP forecast for next year to 6.2% from 5.6% earlier this week.
"Recently, there has been some improvement in US case growth news, and US data have been a little better than
original expectations of softer growth after the partial reversals in reopening in parts of the country," Goldman Sachs said.
It added: "But we think the shifts in growth pricing also likely reflect increased optimism about prospects for an early vaccine. Our own US growth forecasts, which were upgraded earlier this week, now incorporate a vaccine approval by the end of 2020, and widespread distribution by the end of 2021 Q2 as the central case."
The S&P 500 closed at 3,380.35 on Thursday, a whisker away from Wednesday's all-time-high close. It's up about 51% since touching 3-1/2-year lows of 2,237.40 in March amid the market turmoil over the coronavirus crisis.
The index's explosive upward correction has been attributed to investors assessing the type of economic recovery in a post-COVID-19 world. They also remained quite sensitive to news about vaccine progress and to central banks' rollout of different stimulus packages to help companies and businesses survive the crisis.
Goldman Sachs' most recent S&P 500 prediction is in line with those of other renowned market strategists.
The market bull Ed Yardeni said this week that unprecedented stimulus and stocks' bullish trend would drive stocks up another 5% by the end of this year and another 14% by the end of 2021.
The veteran market-watcher has turned optimistic about the stock market again after telling Business Insider that stocks could fall 15% to 20% if tensions between the US and China persist and the US economy does not recover before 2022.