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Goldman Sachs Warns about a US Stock Market Crash

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  • US stock markets have shown weakness over the last few trading sessions. After crashing in March, US stock markets recovered in April. So far, the markets are down slightly for May.
  • Goldman Sachs sees the S&P 500 crashing to 2,400. The S&P 500 was near 3,000 earlier this week but didn’t hold that level.
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Is a US stock market crash coming?

Several fund managers have been warning about a crash in US stock markets. Paul Tudor Jones and Jeffrey Gundlach expect US stock markets to retest their March lows and form a double bottom. The S&P 500 fell as low as 2,191 on March 23. The Dow Jones Index fell to a low of 18,213 the same day. At one point, the Dow Jones crash erased all of the returns under Trump’s presidency.

S&P 500 and Dow Jones Index in 2020

However, US stock markets have been strong since March 23. Last week, the Nasdaq Composite Index (NASDAQ:QQQ) turned positive for the year. The S&P 500 almost reached the 3,000 level. On a YTD (year-to-date) basis, the S&P 500 has only fallen by about 11%. The Dow Jones Index (NYSEARCA:DIA) has fallen 16.7% YTD. The S&P 500 (NYSEARCA:SPY) looked set to breach its 200-day moving average earlier this week. However, the index didn’t breach its 200-day moving average. Traders see the price moving above the 200-day moving average as a bullish indicator. Similarly, some might see the S&P 500’s failure to move above the 200-day moving average as a bearish indicator. Now, Goldman Sachs expects the US stock market to crash.

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Goldman Sachs sees S&P 500 at 2,400

Goldman Sachs expects the S&P 500 to crash to 2,400. However, the firm expects the S&P 500 to end the year at 3,000 level. According to Goldman Sachs, several factors would contribute to the US stock market crash.

  • international tensions
  • the 2020 US presidential election
  • companies lowering their dividends
  • higher provisioning at US banks and lower share repurchases
  • staggered recovery
  • increasing infections outside New York

Meanwhile, US states have been reopening gradually under pressure. Tesla (NASDAQ:TSLA) opened its Fremont plant even though it didn’t have the permission to do so.

Would bears win?

Currently, stock markets have been ignoring several risks. From a fundamental perspective, this is the worst economic slowdown since the Great Recession. We still don’t have a vaccine for COVID-19. In my view, unless we get a vaccine, it would be futile to expect business as usual. Markets have been excited about the massive global stimulus. However, they have been ignoring the risks that higher borrowings entail. Also, the global debt-to-GDP was at record highs last year.

US stock markets versus economic reality

US stock markets have got detached from economic reality. Eventually, markets adjust themselves over the long term. Legendary value investor Warren Buffett isn’t sitting on a $137 billion cash pile without a reason. While we might ignore the subtle warning from Buffett, the disconnect between US stock markets and the economy hasn’t been this stark in recent times.

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