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Goldman Sachs’ S&P 500 Price Target Is Rosy, but Don’t Take the Bait

Last Updated September 23, 2020 2:24 PM
Stephanie Bedard-Chateauneuf
Last Updated September 23, 2020 2:24 PM
  • Goldman Sachs raised its end-of-year S&P 500 target amid vaccine hopes.
  • The upcoming presidential election and vaccine uncertainty are threatening the stock market rally.
  • Investors should look at global markets for better opportunities.

Goldman Sachs just raised its S&P 500 price target. The investment firm forecasts a 7% gain from here to a new record.

Goldman Sees The S&P 500 Going to 3,600

David Kostin, Goldman’s head of U.S. equity strategy, raised his 2020 forecast for the S&P 500 from 3,000 to 3,600  after the broad equity benchmark climbed more than 50% from its March low. The new forecast represents a 7% gain from Friday’s S&P 500 close of 3372.85.

The S&P 500 flirted with its February record of 3,393.52 on Monday. | Source: Yahoo Finance 

The strategist said valuation is driving the hike in his target. The S&P 500 traded 17 times forward earnings estimate in February, and now the ratio is around 20 times. Goldman’s new target for the end of the year involves a multiple of 21 times its 2021 earnings estimate of $170 per share.

Goldman Sachs’ analysts justified their target by Goldman’s U.S. growth forecast, superior to consensus, which takes into account positive news on the vaccine front.

Improving economic numbers, and unprecedented financial aid from the Federal Reserve and Congress have also driven the stock market rally.

The bank believes that meager bond yields have made stocks more attractive to investors despite downward revisions to expected earnings. The S&P 500 currently offers a dividend yield of 1.67% compared to the 10-year Treasury yield of just 0.6%.

What Could Halt the Stock Market Rally

Goldman’s S&P 500 forecast seems too rosy. There are significant looming risks that could derail the market rally.

Video: Election and Vaccine Uncertainty Could Bring Volatility in the Stock Market

The presidential election remains a significant uncertainty for the market as the pandemic causes unique difficulties in the voting process. A Biden presidency would be a disaster for the stock market. Joe Biden’s tax plan includes corporate tax hikes, which could cut S&P 500 earnings by as much as 12%.

David Kostin said: 

Election uncertainty suggests near-term risk to our target is tilted to the downside. Of course, the largest risk to our forecast is the timing of a vaccine and path of recovery from the pandemic.

If a viable vaccine doesn’t become available by year-end, the recession will last longer, which would have catastrophic consequences for the U.S. economy.

The United States’ clumsy response to the pandemic and its hesitation over a new aid package cast doubt on its economic outlook.

The U.S. economy contracted at an annual rate of 32.9% from April to June , by far the worst quarter on record. The numbers are expected to rebound strongly in the second half of the year but will leave the U.S. economy well below where it was at the start of 2020.

After the spring restrictions, many U.S. states declared victory over the virus too soon and reopened their economies, leading to a resurgence of COVID-19 cases. Confirmed infections are increasing in most states. Many businesses have had to scale back or even cancel plans to reopen.

Video: What Four Experts Are Watching Now

Consumer spending is the main engine of the U.S. economy. A report released on Friday showed further improvements for U.S. retailers, albeit less than economists expected.

Economists say consumer spending could come under more pressure  after government assistance expired, including additional weekly unemployment benefits of $600.

The S&P 500 is overvalued. There are better opportunities in global markets now than in the U.S. stock market, especially in Asia. The South Korean Kospi index is much cheaper than the S&P 500 , with a P/E ratio of 12.

Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com and should not be considered investment or trading advice from CCN.com. The author holds no investment position in the above-mentioned securities.