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Goldman Sachs warns stocks will tumble 18% in the next 3 months — and lays out 6 risks they think investors are ignoringhttps://www.businessinsider.in/stock-market/news/goldman-sachs-warns-stocks-will-tumble-18-in-the-next-3-months-x2014-and-lays-out-6-risks-they-think-investors-are-ignoring/slidelist/75680918.cms2020-05-11T21:41:45+05:30

Goldman Sachs warns stocks will tumble 18% in the next 3 months — and lays out 6 risks they think investors are ignoring

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Ben WinckMay 11, 2020, 21:41 IST

Goldman Sachs warns stocks will tumble 18% in the next 3 months — and lays out 6 risks they think investors are ignoring — Ramin Talaie/Corbis/Getty Images
Goldman Sachs expects the S&P 500 to close the year 2% higher, but not before enduring an 18% plunge over the next three months.
The stock market's recent leap from late-March lows is best attributed to investors' "fear of missing out," the team of analysts led by David Kostin wrote Friday.
The S&P 500's lofty valuation faces several near-term threats before economic stabilization in the third-quarter pushes it higher, the firm added.
Listed below are the six risks Goldman says investors are overlooking. The firm thinks these will be responsible for pushing US stocks lower over the next three months.
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Several factors stand to pull the S&P 500 lower before it rises into year-end, Goldman Sachs analysts said Friday.
The bank sees the benchmark index closing the year at 3,000 — roughly 2% higher than its Friday close of 2,930 — as the coronavirus threat fades and the economy rebounds. Yet Goldman's forecast also reflects an 18% downside to its three-month target, with looming threats dragging the benchmark index to 2,400 by the end of the summer.
"A single catalyst may not spark a pullback, but a number of concerns and risks exist that we believe, and our client discussions confirm, investors are downplaying," a team led by chief US equity strategist David Kostin wrote in a client note.
The stock market's recent surge from late-March lows is best attributed to a "fear of missing out" attitude among investors, and skepticism surrounding the rally's strength remains, Goldman added.
Listed below are the six risks Goldman says investors are overlooking. The firm thinks these will be responsible for pushing US stocks lower over the next three months as they become fully realized.
Read more: A fund manager who's quadrupled his competitors' returns for 15 years breaks down his 3 favorite stocks — and his top 3 contrarian ideas
Read the original article on Business Insider

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6. International tensions

6. International tensions — US President Donald Trump, left, and Chinese President Xi Jinping arrive for a meeting on the sidelines of the G-20 Summit in Hamburg, Germany. AP/Saul Loeb
Domestic politics aren't the only affairs driving heightened market risk. A recent rekindling of trade tensions between the US and China weighed on investors in early May and reminded markets of the still-unresolved dispute. The White House's actions toward China are "turning more hawkish," Goldman said, and the conflict will likely rear its head once the pandemic subsides.
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5. The 2020 election

5. The 2020 election — Sam McAfee, warehouse supervisor with the Baltimore City Board of Elections, talks on the phone near voting booths set up ahead of the 7th Congressional District special election at Edmondson High School, Monday, April 27, 2020, in Baltimore. AP Photo/Julio Cortez
If the coronavirus pandemic and global oil-price conflict didn't add enough volatility to the stock market, investors have the 2020 presidential election to look forward to. Goldman sees market focus shifting to the race in the third quarter as the economy stabilizes, and all eyes will be on how corporate tax policy could change in the wake of a Democratic Party victory.
The 2017 tax cut could be reversed if President Donald Trump leaves the White House, and corporate profits would significantly suffer for it. The analysts forecast the S&P 500's earnings per share sliding by $19 next year if such a policy action is taken. The index's price-earnings multiple would rise 15% from its "already stretched valuation," Goldman added.

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4. Slashed dividends

4. Slashed dividends — Getty Images
Companies enduring the economic downturn will likely cut their dividend payments as well, the team wrote. More than 40 stocks have lowered or suspended their payments in 2020 so far, and Goldman sees dividends sliding 23% through the full year.
Capex spending will plunge 27% in 2020, the bank added, with corporate growth plans halted until the economic backdrop improves.
Read more: 'We'll see the true financial carnage come': A 47-year market veteran warns the fallout from the coronavirus is only halfway finished — and says it'll take decades for the market to carve out new highs

3. Swelling loan-loss protections

3. Swelling loan-loss protections — Spencer Platt/Getty Images
Major US banks sacrificed profits for loan-loss reserves in the first-quarter, shoring up cash to protect against souring debt. Reserves totaled $46 billion in the three-month period compared to $49 billion in all of 2019, according to Goldman, and defensive move assumed the unemployment rate would only rise to about 10%.
With the labor market taking a harder-than-expected hit, the analysts now see $115 billion in additional reserve bolstering over the next 12 months.
The move will likely force more companies to cancel stock repurchase programs. Goldman expects buybacks to shrink 50% this year, pulling back on the stock market's biggest source of demand over the past decade.
Read more: A Wall Street expert lays out how the stock market's 'downright terrifying' surge within this crisis may be laying the groundwork for another 32% crash

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2. A lengthy reboot

2. A lengthy reboot — David McNew/Getty Images
Goldman cited a recent call from IDEX Corp. while forecasting a drawn-out rebound. The manufacturing giant expects the US upswing will come with "fits and starts," adding that expectations of a full recovery by the fall are "crazy talk."
Data released Friday morning suggests the nation's job market will post a similarly slow bounce-back. The Labor Department revealed nonfarm payrolls plummeted by 20.5 million in April, pushing the unemployment rate to 14.7%. With many major employers struggling to stay solvent, hiring likely won't rebound in the near-term.
Read more: BANK OF AMERICA: Investors should buy these 12 cheap stocks to bet on the coming US recovery — but they should steer clear of these 8 competitors

1. Growing infection rates outside New York

1. Growing infection rates outside New York — MANDEL NGAN/AFP/Getty Images
While New York has shown positive results from its widespread efforts to contain the coronavirus, several outbreaks throughout the US are just beginning. New infections across the US are increasing, suggesting the quick rebounds seen in Germany and China won't come easily.
Infection rates could grow even more as states reopen their economies. Without a vaccine, a prolonged nationwide outbreak will likely quash indexes' weeks-long rally, the analysts wrote.
Read more: A real-estate investor who generates $165,000 in revenue a year lays out his 'absolutely perfect' strategy for aspiring entrepreneurs clamoring for passive income

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