S&P 500: Unlikely to fall on dismal earnings, economic damage – Goldman Sachs

 Zach Pandl, Co-Head of Global FX and EM Strategy at Goldman Sachs, said in his latest research note, the US stocks, including the S&P 500 index, are likely to stand resilient to the dismal US earnings seasons and coronavirus-led economic contraction.

Key quotes

“That’s based on historical analysis that suggests equities price in macroeconomic performance over a two-year horizon. As long as projections are -- as they indeed are now -- for the economy to rebound after the current and coming period of pain, then stocks don’t need to fall.

Investors usually discount at least the next two years of macroeconomic performance, suggesting markets may continue to look through bad news over the near term if it can reasonably be expected to reverse in the coming quarters.

Early April, the expectation was for a 4% decline in US gross domestic product, with an expansion of about 4% seen for 2021 and 3% for 2022. That marks an unusual pattern for a recession, when economists typically downgrade coming year expectations as well as current-year ones.

Metrics that focus only on growth over the next one year (e.g., multiples based on next-12-month earnings expectations) will overstate current valuations, given the large rebound expected beyond this year.

“For similar reasons, more disappointing data over the near-term may not affect market pricing if activity is expected to snap back relatively quickly.”

It’s worth noting that the US equity markets have rebounded sharply over the last month, with the S&P 500 index up nearly 30% from its March 23 close.