Goldman Sachs is the latest firm to raise the S&P 500’s target. Goldman Sachs’s strategists, including David Kostin, boosted the target price by 26 percent, which increased the year-end target by 20 percent to 3,600 from 3,000.
Why did Goldman Sachs raise the S&P 500’s target?
There is still uncertainty in 2020 amid the coronavirus pandemic, strained U.S.-China relations, and the upcoming U.S. presidential election. Although the turbulence has not impacted the stock market significantly, the markets have slowed in the past few weeks.
“It’s the liquidity, stupid.” Why is Goldman Sachs making a case for higher stock prices based on fundamentals for the S&P 500 Index, currently trading at a P/E north of 22, its highest in years. It’s all about stimulus at this point. Period. https://t.co/BtWHRQ5Ouk— David Kudla (@David_Kudla) August 14, 2020
According to a report from The Wall Street Journal, Lyn Graham-Taylor, a senior rates strategist at Rabobank, said, “We had this vibe that the bottom of the economic slump wasn’t quite as bad as people’s baseline forecast. But there’s also a feeling right now that the recovery is not going to be a quick ‘V’ shape. It’s going to be slower.”
Goldman Sach expects the 10-year Treasury to rise from 0.7 percent currently to 1.1 percent by the end of 2020. Although the relative valuation would be higher, the strategists expect the equity risk premium to be lower.
According to MarketWatch, strategists think the economy will rise faster than the market’s expectations next year. The higher growth expectations are due to positive news on the COVID-19 vaccine front. Goldman Sachs expects a coronavirus vaccine by the end of 2020 with wide distribution in the first half of 2021.
Kostin explained that the U.S. elections could impact Goldman Sachs’s prediction. However, the largest risk for the prediction is still the timing of a COVID-19 vaccine and the recovery from the coronavirus pandemic.
Goldman Sachs provided an EPS estimate for S&P 500 companies in 2021 at $170 per share. The estimate is above Wall Street’s estimate of $165 per share. The strategists said, “Our EPS estimate is driven by higher sales and an expansion in profit margins to 11.4 percent, back to the level of 2019.”
S&P 500’s performance in 2020
So far, the S&P 500 has been on a rollercoaster ride in 2020. The S&P 500 hit an intraday high of 3,393.52 on Feb. 19. On the same day, the index had a record close of 3,386.15. By March 23, the index tanked to a low of 2,191.86 due to the COVID-19 pandemic.
At 3,372.85 currently, the index is 51 percent off its March lows. The rally amid the COVID-19 pandemic has surprised investors. The continuous surge since March has blown away the predictions for the index in 2020.
Will the S&P 500 close above its record of 3,386.15 on Feb. 19? The index traded above that level on Aug. 12 and 13 but did not close above the record.
How is the S&P 500 today?
According to CNBC, although the S&P 500 closed slightly lower on Aug. 14, it gained over 0.6 percent last week. Heading into today’s trading session, the index is nearly 54 percent above its record low on March 23.
So far, U.S. stock futures are steady this morning. Today, the S&P 500 index is taking aim at the record closing. The index is less than 1 percent away from the record closing level on Feb. 19.