Goldman’s Rosy Stock Market Bottom Call Is Ridiculously Foolish

April 13, 2020 2:29 PM UTC
Goldman Sachs predicts the stock market won’t crash to new lows. But Morgan Stanley offers a much more realistic recovery timeline.
  • Goldman Sachs predicts that the S&P 500 won’t register new lows.
  • The investment bank’s forecast is based on the assumption that there won’t be a new wave of infections after the economy reopens.
  • Morgan Stanley offers a much more realistic timeline of economic recovery.

The U.S. stock market has rocketed off its lows, and Goldman Sachs dubiously predicts it won’t test them again.

The investment bank, which has nearly $1.3 trillion in assets under management, says unprecedented public sector support and the decreasing coronavirus infection rate catalyzed an ironclad recovery.

Yet while the Fed can launch one bazooka after another, it’s foolish to assume the coronavirus outbreak has reached a permanent inflection point. The stock market and the economy could continue to bleed until the pandemic no longer poses a threat.

Goldman Analyst Suddenly Reverses Prediction That S&P 500 Hasn’t Bottomed

For Goldman’s bottom prediction to stick, the U.S. economy must return to full swing without interruptions. | Source: Spencer Platt/Getty Images/AFP

In a dramatic turn of events, Goldman Sachs chief equity strategist David Kostin predicted that the S&P 500 wouldn’t hit a new bottom below its current 2020 low of 2,191.90.

Just one month ago, Kostin had warned that the bellwether index could plummet to 2,000 as the novel coronavirus rocked the U.S. economy.

He said,

The coronavirus has created unprecedented financial and societal disruption. Equities are a leading indicator because a bear market has occurred without the release of any relevant earnings or macro data… A combination of tools suggests the S&P 500 could trough around 2000.

Goldman Sachs’ David Kostin says the S&P 500 has already bottomed and that the stock market won’t return to those lows. | Source: Yahoo Finance

Kostin is retracting that forecast. He praises the swift decisions of policymakers, including the $2 trillion stimulus plan that he says prevented an economic meltdown.

The Fed and Congress have precluded the prospect of a complete economic collapse… These policy actions mean our previous near-term downside of 2,000 is no longer likely for the S&P 500 Index.

But all of this hinges on one thing. That there isn’t a second wave of coronavirus infections after economic lockdowns end.

While social distancing measures are curbing the spread of the virus, saying that it won’t reemerge is downright silly unless someone develops a vaccine.

The U.S. remains the epicenter of the coronavirus pandemic with over 560,000 cases. And the data suggest that the pandemic won’t be over any time soon.

Morgan Stanley Warns of Infection Surge After the Economy Reopens

For Goldman’s bottom prediction to stick, the U.S. economy must return to full swing without interruptions. Should we see a spike of coronavirus cases, it is very likely that the stock market will crater.

Morgan Stanley offers a sobering forecast regarding the path to recovery. The investment bank said,

The US outbreak is far from over. Recovering from this acute period in the outbreak is just the beginning and not the end.

Source: Twitter

Without a vaccine, the U.S. economic downturn could persist – along with the bear market in equities. Matthew Harrison, the head of biotech research at Morgan Stanley, wrote,

Investors cannot afford to lose sight of the fact that only a vaccine will provide a true solution to this pandemic.

Goldman may be right that Congress and the Fed are ready to dig deep to keep the economy from collapsing. But it’s ridiculously foolish to bet that the stock market has bottomed based exclusively on hopes that there won’t be a second wave of infections.

Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com.

Josiah Wilmoth edited this article for CCN.com. If you see a breach of our Code of Ethics or find a factual, spelling, or grammar error, please contact us.

@kirilnikk123

Kiril is a CFA Charterholder and financial professional with 6+ years of experience in financial writing, analysis and product ownership. He has a bachelor's degree with a specialty in finance and lives in Canada. Kiril’s current focus is on finance and cryptocurrencies. He also has his personal website, Investor Academy, where he teaches people about the basics of investing. He owns Bitcoin, Ethereum, and other cryptocurrencies. He holds investment positions in the coins but does not engage in short-term or day-trading. Get in touch with Kiril: Muck Rack, Email, Follow on Twitter