Even with the recent tech sell-off, the S&P 500 index can still set a record high and reach 3,600 by year-end. This is what Goldman Sachs analysts wrote in a note issued last Friday, Sept 11.
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Goldman Sachs Says S&P 500 Index Will Hit 3,600
Goldman analysts led by David Kostin said that they also see the S&P 500 index reach 3,800 by mid-2021. They attribute the optimism to the expected availability of Covid-19 vaccines by then. The company adjusted its target index by 20%, as it realizes the Index’s potential of getting back to the milestone.
Since the all-time high record of 3,520.25 set last August, the S&P 500 index has lost momentum. It especially dropped hard during the recent tech sell-off, losing as much as 2.5% in a single week. The drop is the index’s largest weekly fall in the last three months, giving fears to a crash. While it rebounded after that, the index is still 5% below the record. Last Friday, it closed at 3,340 points.
Recovery by 2021
Goldman Sachs wrote: “Despite the sharp sell-off in the past week, we remain optimistic about the path of the US equity market in the coming months. The Superforecaster probability of a mass-distributed vaccine by 1Q 2021 has surged to 70% and economic data show a continuing recovery.” They added: “We still expect the market will rise to 3,600 at year-end 2020 (+8%) and 3800 at mid-year 2021 (+14%) driven by improving earnings prospects and a declining risk premium.”
They have also noted the report of superforecasters on the availability of vaccines. Good Judgment estimates the probability of an available vaccine for all by the 1Q 2021 at 68%. This is 28% higher than the previous estimate of 40% three weeks ago.
US GDP fell at a record pace in the second quarter. Looking ahead at a full recovery, investors have targeted 2021 to achieve that. Economists believe that GDP will reach 6.4%, which will lead to S&P companies’ earnings to increase by 30%. In contrast, analysts project a loss of 20.3% in earnings for the same companies this year.
Experts believe that “equity risk premiums,” will fuel the rally. These are a combination of economic growth and investor confidence.
JP Morgan Is Optimistic As Well
Rival bank JP Morgan sees the same future for the S&P 500. Their team led by Dubravko Lakos-Bujas also thinks the S&P will reach 3,600 by end of the year, a 6% jump from present levels. They said that the index’s earnings recovery was “ahead of expectation” due to many factors. This includes the Fed’s support, the reopening of global economies, and long tech plays. They noted that tech companies are resistant to the pandemic’s economic impact. As a result, their profits “helped offset broader earnings weakness.” As such, JP Morgan predicts that the index’s earnings per share would hit $136 by the end of the year and $170 in 2021. These are higher than the consensus estimates of $130.19 and $166.39. Goldman Sachs also has the same prediction for 2020 at $170.
The biggest remaining threat to the economy is the US election uncertainties. A win by the incumbent may mean fewer policy changes, but it doesn’t guarantee confidence. A new administration may also shake foundations in its bid to clean the house.
A stimulus bill is also expected by Americans at this point. Every day that a bill isn’t passed, the probability of getting relief grows dimmer. The prospect of getting a stimulus package can help electrify the market, while a certain no can erode some confidence. Apart from affecting the market, this uncertainty can also swing the vote both directions.
Watch this as Heath Terry, Goldman Sachs lead tech analyst, joins CNBC’s “Squawk Alley” to discuss tech stocks after a previous week of losses:
Do you agree that the worst is over and we can look forward to 2020 ending on a hopeful note? Or do you think that this roller coaster ride is about to kick up a notch with the coming elections? Let us know what you think by leaving your comments below.