Goldman Says S&P May Fall 41% From Peak. But Who’s Counting, Right?

“Sell! Sell! Sell! was the story of this week’s 9% plunge in stock prices as the longest bull-market in history ended just days after its 11th anniversary”, Goldman writes, in an amusing installment of their US Weekly Kickstart series that finds David Kostin employing a more lively cadence than usual.

Stocks are, of course, coming off the second-worst seek since the crisis, and had it not been for Friday’s late-session stick save, it would have been far (far) worse.

Thursday was the single-worst session for US equities since 1987, and as I wrote Wednesday, many current market participants have simply never witnessed anything like this before. After all, Lehman was nearly a dozen years ago, which means someone who’s, say, 25 now, was just 13 years old when I was dumping the “gin-soaked ice cubes” in Mikey and Becca’s sink.

Goldman underscores how absolutely manic this must all seem to those who have never been subjected to a trial by fire.

“The swiftness of the bear market has unsettled many young market participants”, Kostin says. “In contrast, veteran investors recalled the rout of Black Monday (October 19, 1987) — when stock prices collapsed by more than 20% in a single day“.

He describes the market and social disruptions catalyzed by the coronavirus outbreak as “unprecedented” and says the only question on everyone’s mind is simply this: “What is the floor for stocks?”

Spoiler alert: Nobody knows, especially given that between dealer hedging flows exacerbating directional moves, systematic deleveraging and an absurdly thin market, daily swings of 3% or more have only been witnessed with such frequency during the GFC and the Great Depression.

Kostin admits that “precision is difficult in a volatile market with daily price swings of +/-5% and a VIX level of 75”, but says “a combination of tools suggests the S&P 500 could trough around 2000”. That is a 26% drop from where we are now, and a full 40% below the all-time highs hit just last month.

There’s really no point in walking through the math because Kostin provides the following simple table which summarizes a trio of approaches to estimating a near-term bottom:

(Goldman)

“Taking the median of the trough levels implied by the Fed Model (2000), DDM (2100), and historical example (1700) indicates a potential S&P 500 trough of 2000”, he writes.

Fortunately, the bank’s base case is not 2,000. Rather, it’s 2,450 SPX. That’s derived from the bank’s new EPS forecast, which now includes an earnings recession in 2020.

You’ll recall that late last month, Goldman slashed its earnings outlook to reflect flatlining profit growth in 2020. They now see a 5% decline in EPS to $157. Here’s a visual on that:

When you slap a 14X multiple on 2021’s estimated EPS, you get 2,450.

And yet, Kostin cautions that “the combination of thin liquidity, high uncertainty, and positioning could cause the S&P 500 to fall below our 2,450 base case estimate of fair value and closer to a trough of 2000”.

I’ll just leave you with one very poignant visual: