If share prices partly reflect the future potential of the economy, Goldman Sachs has just sent an important signal to investors to begin to ease the burden on red-hot stocks in the face of a challenging second half of the year caused by the implacable COVID- 19 pandemic.
Goldman Sachs economists, led by Jan Hatzius, slashed their third-quarter GDP forecasts by 8% to 25% in a new note for clients. Previously, Goldman Sachs had expected 33% growth driven by the reopening of states that has sent an avalanche of people to spend in bars, restaurants, and retail stores. But with COVID-19 infections on the rise again in several states and governors re-establishing some form of blockade, Goldman believes the economy is poised to exceed its previous estimates.
“A combination of tighter state restrictions and voluntary social distancing is already having a noticeable impact on economic activity. States with the most severe deterioration in Covid’s situation saw declines in consumer and workplace activity in late June that are likely to continue in July, and activity flattened out in other states, ”writes the Goldman team. . “The healthy rebound in consumer services spending seen since mid-April now appears to have stalled in July and August as authorities impose additional restrictions to contain the spread of the virus. However, the ongoing recovery in manufacturing and construction should not be greatly affected. ”
Goldman economists lowering their third-quarter GDP forecast could be a precursor for their equity team to take a more defensive stance on stocks soon.
The investment bank’s equity strategists led by David Kostin have held steady in recent months with a year-end S&P 500 price target of 3,000, underpinned by a strong acceleration in growth in the second half. But the S&P 500, currently at 3,130, has surpassed that estimate in hopes of a sustained V-shaped recovery among market goers. That may be unlikely, judging by Goldman’s revised macroeconomic thinking.
Market scenes
Goldman’s more moderate growth outlook is refreshing.
Signs of stock exuberance abound at this time. In other words, investors wear pink glasses in the economic recovery, and the prospects for a new fiscal stimulus this summer, despite the fact that the pandemic continues and growth is under renewed pressure.
Global economy and technology concept. [Credit: Getty]
For one, the leading price-to-earnings multiple in the S&P 500 is 21.7 times, a level not seen since the internet bubble of the late 1990s, according to Yardeni Research. This level of valuation seems to blatantly ignore the main risk of the upcoming second-quarter earnings season, where S&P 500 earnings are expected to accumulate 43% year-over-year. So far, there have been 34 negative prior announcements about companies’ earnings in the second quarter compared to 25 positives, according to Refinitiv data. Second quarter revenue is projected to drop 11.8% from a year earlier.
Meanwhile, countless technological actions have been separated from any form of economic reality.
The Nasdaq High-Low ratio has consistently remained around 1, SunDial Capital Research notes, which means that many more tech stocks are trading at 52-week highs rather than 52-week lows. Tesla surpassed Toyota as the world’s most valuable automaker last week, though its earnings outlook is far from certain. Tesla’s new electric truck rival Nikola is now valued at more than $ 20 billion after debuting on the Nasdaq on June 4.
The company has yet to produce any of its great trucks, and it still has no profit to speak of.
“What you are seeing today is a sustained recovery in the likelihood that we will see some form of therapy or treatment coming to light later this year or early 2021. I am not so sure I am comfortable with saying that we are in a bull market, “said RSM chief economist Joseph Brusuelas in Yahoo Finance’s The First Trade.
Goldman may not be so sure, either.
