Goldman Sach analysts are raising their forecasts for U.S. stocks, suggesting that better-than-expected third-quarter earnings and optimism around Pfizer’s COVID-19 vaccine trial will send the S&P 500 well into record-breaking territory by the end of the year.
In a note published Wednesday, a team of analysts led by David Kostin said the S&P 500 could hit 3700 by year end, up around 4 per cent from the current level, and rise to 4300 by the end of 2021. This will be supported by a rotation towards value stocks that have underperformed during the pandemic, and a jump for cyclical stocks set to benefit from a broader economic recovery.
The Goldman forecast is based on several assumptions: at least one COVID-19 vaccine will be approved by U.S. regulators; Republicans will retain control of the Senate; corporate profits will rebound sharply from pandemic lows; and interest rates will remain low.
JPMorgan analysts made a similarly optimistic call on Monday, suggesting that the S&P 500 index could hit 4,000 by early 2021.
To take advantage of the next leg up for U.S. stocks, investors should look to deep value stocks that could benefit from a vaccine, stocks with long-term secular growth prospects and good R&D and capex investment, and companies with strong Environmental, Social, and Corporate Governance (ESG) performance, the Goldman analysts wrote. They recommend being overweight in information technology, health care, industrials and materials.
“We expect the emergency use authorization and distribution of an effective vaccine during the next several months will lead to significant upward earnings revisions for virus-exposed firms and help give investors confidence to rotate into those low-valuation stocks,” the analysts wrote.
“Cyclical energy, materials, and industrials sectors are likely to outperform upon the vaccine’s approval while information technology and communication services are likely to lag. However, the low interest rate regime will continue to support the valuation of sectors and stocks with superior long-term growth prospects."
The analysts expect the gains to broaden out beyond the Big Tech names that have driven so much of the S&P 500′s performance over the past eight months. At the same time, they said that fears of a sharp correction in mega-cap technology stocks may be overstated.
“Many investors have expressed concern that the extremely high current level of market concentration means that an effective vaccine would result in a lower US equity market. We disagree. Although the five FAAMG [Facebook, Amazon, Apple, Microsoft and Google] account for an extraordinarily large market weight, their impact on the index return would still clearly be outweighed by a rally of the other 495 stocks that account for 78 per cent of the S&P 500 index,” the analysts wrote.
The note did contain warnings about both the development of a vaccine and the uncertain state of U.S. politics.
“Even with trial results showing efficacy, uncertainty remains regarding the safety, distribution, and uptake of a vaccine as well as its eventual impact on economic activity. In addition, the degree of political conflict in Washington, D.C., and the uncertain paths of fiscal and regulatory policy will continue to have important consequences for economic growth, corporate profits, and investor sentiment."
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Mark Rendell