Goldman Sees ‘Roaring ‘20s Redux.’ S&P To Hit 4,600 In 2022

“A vaccine is a more important development for the economy and markets than the prospective policies of a Biden presidency,” David Kostin wrote, in the very first line of Goldman’s 2021 US equity outlook entitled “Roaring ’20s Redux.”

For Kostin, Pfizer’s vaccine (or really just a vaccine) should “allow society to gradually normalize during 2021.”

When you factor in the assumed benign read-through for equities from divided government and a number of additional assumptions, Goldman said you can expect the S&P to hit 4,100 by mid-2021 and 4,300 by the end of next year. By the end of 2022, the index will be perched at 4,600, Kostin projected, in the new outlook, dated Wednesday.

To be sure, Goldman’s baseline assumptions for next year paint a rosy picture. In fact, they read like a best-case scenario more than a baseline. That’s not to disparage, and it’s certainly not to suggest that any one of their assumptions is far-fetched. In fact, all of their assumptions seem eminently likely to play out.

I would just caution that even if a set of assumptions is comprised entirely of projections that appear probable, they often do not all pan out at once, or at least not according to plan or schedule. With that caveat, here are Goldman’s baseline assumptions for 2021:

  1. At least one vaccine is approved by the FDA and administered to a large portion of the US population.
  2. The federal government is divided with the Republicans maintaining majority control of the Senate following the Georgia elections.
  3. Policy uncertainty declines.
  4. The economy continues its “V-shaped” recovery.
  5. S&P 500 profits rebound sharply from their pandemic lows.
  6. The Fed remains on hold with a stable fed funds rate of 0-25 bp.
  7. The yield curve steepens but ten-year Treasury yields climb only modestly.

Most of those seem entirely reasonable, and a few are foregone conclusions. For example, it would be a real shock if no vaccine (not a single one) was approved by the FDA.

You may be skeptical about the language employed by Kostin in some of those numbered bullet points, but if you replace terms like “V-shaped” and “rebound sharply” with more mundane language that conveys the same thing, there isn’t anything there that I’d describe as particularly starry-eyed.

On the vaccine, Goldman expects the Pfizer shot “and perhaps other vaccine candidates, will receive emergency use authorization by January, and sufficient doses will be available to vaccinate the US population during the first-half of 2021.”

Again, it helps to step back from the language employed and just couch it in more general terms. All Goldman is saying is that vaccine approval is likely, and it will be followed by a generally successful effort to distribute it widely by the end of July. That’s not far-fetched. Optimistic? Maybe. But not far-fetched considering how far along the candidates are.

That said, Kostin does acknowledge that the timeline on development was impressive, which could be construed as a euphemistic way of sounding a cautionary note, only without actually saying it. “Within less than a year, a vaccine has been discovered,” he wrote. “The previous record for the fastest time to develop a vaccine occurred during the late 1960s when it took four years to develop a vaccine for the mumps.”

Goldman lifted its EPS forecasts for the S&P in conjunction with the new outlook. For this year, the bank sees $136, down 17%. In 2021, 2022, 2023, and 2024, Goldman sees $175, $195, $207, and $218, respectively. The bank’s S&P target for year-end is now 3,700.

You might be asking yourself about valuations. We all know US equities have enjoyed support from low rates, and it’s difficult to get a “clean” read on multiples at a time when pandemic distortions have waylaid profits to an extent that may prove fleeting or may not, depending in part on the success of the vaccine distribution effort and the public’s faith in science.

In short, it’s all relative. “Reconciling the signals of absolute vs. relative valuation is challenging,” Kostin remarked, noting that “stocks are highly valued on an absolute basis relative to history” with the index trading above the 90th percentile on a laundry list of metrics.

The figures in the visual (above) “suggest caution is warranted,” Goldman said. But the bank noted that “the index and the median S&P 500 constituent are actually modestly undervalued on a relative basis compared with US Treasury yields and corporate bond yields.”

One more time: It’s all relative.

When it comes to 2021’s year-end forecast, Kostin said that although it does imply further multiple expansion, “valuations relative to bond yields would rank in just the 51st percentile vs. history”.

You can, of course, thank the Fed for this. “Accommodative Fed policy and low interest rates make equities appear attractive on a relative basis vs. fixed income alternatives, pushing investors out on the risk curve,” Goldman emphasized.

I could just end this right here with the standard “what could go wrong?” cliché. And, now that you mention it, I think I will.


 

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13 thoughts on “Goldman Sees ‘Roaring ‘20s Redux.’ S&P To Hit 4,600 In 2022

  1. Goldman’s prediction sounds just great for the top 20% (or 15 or 25). What about everyone else. How long can the top 20 feed off the bottom 80. Where’s the living wage, universal healthcare and affordable college education to name just a few things that would help the bottom 80%. At this point the unequal distribution of wealth seems unsustainable for much longer. I’m not a great student of history, but doesn’t this always end in violence and destruction of wealth. Care of the golden goose has been neglected for far too long.

    1. Yes. It does feel like something could snap, doesn’t it?

      The elite do not voluntarily give up their favor. Never. They fail to change and adapt. So, yes, these things usually do end up in volence and destruction of wealth.

      A strategy that buys them time is incremental reform. The elite in the US have failed even to make this accommodation.

  2. We can always count on Goldman to keep “investors” (whatever that means) all lathered up.

    The German-hosted development of the miracle, Pfizer vaccine, though the beginning of the end for COVID, is still several months away from availability to the 800M people of Europe and North America. Estimates vary, but maybe next July is a tad early still for any of us readers to be getting the shots. I hope I’m wrong and we can get the shots by April. I’m dying to go to a bar again.

    Last I checked, about three minutes ago, the plaque was still rampaging across the US. Millions are still poor, hungry, homeless, or unemployed, as a result of COVID. These people aren’t going to be contributing too much to the $175, unless one counts the sale of tents.

    And, we have a government that might as well be that of a foreign adversary, hostile to our nation’s aims, like a departing colonial power, performing it’s last extraction of wealth from the land and people, before withdrawing.

    Would be nice to see a 10% correction here, flush out some of the early ticket holders.

    So, paint me “too early” to strap in on Goldman’s rocket ship.

    1. BBG: “EUR/USD is down 0.5% at 1.1763 amid falling European bond yields, broadly lower option skews, and stops below the 55-DMA at 1.1782; fall is slowed by real money buying interest near 1.1750-1.1770, according traders in Europe
      GBP/USD is down 0.4% and near session low of 1.3220 with Brexit talks set to miss another deadline and roll into next week”

  3. This Goldman (weren’t they about to go bust just 12 years ago after Lehman before the government, the public, saved their ass?) piece reads like a memo from la la land. Assumption number 4 is patently absurd. On what planet (la la) does the biggest recessionary shock in a lifetime in a recklessly over-leveraged system simply end after three months in a miraculous, ecstatic V? Why not also simply delineate a (counter factual) assumption that credit is expanding as opposed to collapsing. Where, exactly, will GDP recovery come from? Certainly not from consumers. The vaccine is a huge deal, but we were entering a global recession (depression) ‘before’ the pandemic, remember? Vaccines might just get us back to that baseline after a year and a half of economic destruction.

    1. Exactly what I was wondering, the part about ‘weren’t we ‘entering a global recession’? Seems to me measures like GDP and productivity were not trending in the right direction.

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