Generally speaking, Goldman is optimistic about the global economy and the US economy in 2020.
The bank’s year-ahead outlook talks up a stabilization in growth following the recent downturn which began in 2018 and may have bottomed late in the third quarter of this year.
That basic premise informs a number of the bank’s top themes and trades for the new year.
Read more: Don’t ‘Cry Wolf Prematurely’
When it comes to US equities specifically, Goldman’s base case is that the bull market will continue in 2020, and that the S&P will hit 3,250 early next year, on its way to 3,400 by year-end (an 18.6X multiple on expected 2021 EPS of $183).
As you might imagine, that somewhat rosy take is contingent upon the election. The following visual shows a downside case that finds the S&P falling 16% to 2,600.
To be sure, Goldman has never been what you might call “fans” of the Trump administration’s trade policies. Indeed, when Kevin Hassett was still running point for the White House on economic propaganda, he once called the bank the “opposition” for suggesting that the tariffs may have a negative effect on corporate America (more fact than opinion).
And while the word “tariff” comes up a half-dozen times in the bank’s 2020 outlook for US stocks, the word “tax” appears 32 times, nearly once per page.
That should give you an idea of what’s behind that downside scenario in the chart. To wit, from Goldman:
Tax rates and tariffs represent two key risks to our top-down earnings forecast. The S&P 500 YTD effective tax rate has equaled 19%, well below consensus expectations for 21%. Analyst estimates currently imply a 21% tax rate in 4Q and in 2020. If the 2019 YTD pattern continues, it could mitigate likely negative revisions to consensus EPS estimates. However, several presidential candidates have proposed raising corporate tax rates, and we estimate every 1 pp change in the effective tax rate would lead to a roughly 1% change in S&P 500 EPS. Our model suggests a complete reversal of the tax cut would translate into 2021 EPS of $162 rather than our current estimate of $183. The impact of tariffs on profits remains highly uncertain. Recent reports suggest that pending tariffs may be delayed or rolled back. Currently, tariffs have been levied on roughly $370 billion of imports from China.
Although the bank doesn’t frame it quite this explicitly, the implication is that the biggest risk to the S&P in 2020 is united government under Democrats.
“Maxims in politics such as ‘United we stand, divided we fall’ do not necessarily hold in investing”, the bank notes, on the way to reminding folks that in the US, stocks tend to do better under divided government than when one party controls the Oval Office, House and Senate.
Given that reality, the title of Goldman’s US equity outlook for 2020 is “United we fall, Divided we rise”.
At the risk of glossing over all manner of nuance (the piece is 40 pages long), the bottom line from Goldman is that “a unified federal government post-election could prompt investors to assume the tax cut is reversed and lower projected 2021 EPS to $162”. When you throw in multiple contraction to 16X, you end up with SPX 2,600, the downside scenario mentioned above.
If you’re wondering what the options market “thinks”, the bank notes that the distribution is wide. Specifically, options currently imply a 22% probability the S&P ends 2020 above 3,400 and a 28% probability the index ends 2020 below 2,600.
Place your bets – and your votes.