Goldman Sachs warns the single biggest driver of stock gains will shrink 33% this year
- Goldman Sachs lowered its annual S&P 500 earnings-per-share guidance to $110 on Friday, forecasting a major slip for stocks' biggest price driver.
- The note implies profits will contract 33% from their 2019 levels as the coronavirus' economic threat intensifies.
- The stock market's EPS recovery can look V- or U-shaped depending on how the coronavirus is contained and how well companies weather months of weak demand, Goldman said.
- The EPS trend could even look L-shaped if the outbreak creates "lasting economic damage" that reduces earnings into 2021 and beyond, the bank added.
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The key to the stock market's rebound lies in an alphabet soup of potential outcomes, according to Goldman Sachs analysts.
The investment bank lowered its full-year S&P 500 earnings-per-share forecast to $110 in a Friday note. The update implies a 33% profitability decline from 2019 as the coronavirus wipes out consumer demand and pulls the economy into a likely recession.
Earnings growth has historically been the biggest driver for soaring stock prices. A 33% year-over-year contraction could drive the S&P 500 as low as 2,000, the analysts wrote, adding that the speed of "business erosion" seen so far "is unprecedented."
The bank's "key question now" is whether an EPS recovery will be V-, U-, or L-shaped through 2020 and into 2021. Initial estimates pegged the virus' hit as a sharp decline in economic activity before demand roars back just as quickly in the second half of the year. Such a trend would drive a V-shaped recovery in EPS, but the latest measures taken to combat the coronavirus' spread could now force a more U-shaped rebound, Goldman said.
Multiple quarters of weaker earnings would extend the market trough before the virus threat fades and profits recover, forming a U-shaped line in quarterly EPS. The difference between a U- and V-shaped market rebound depends on the speed of coronavirus' containment, whether companies can access enough cash to outlast months of weak demand, and whether fiscal stimulus can stabilize the economy, the bank's analysts said.
In an even bleaker scenario, the coronavirus will "create lasting economic damage that reduces the outlook for earnings in 2021 and beyond," Goldman added. An L-shaped EPS trend could force companies to cut costs and lay off workers in an attempt to stay profitable.
The bank's latest forecast isn't all doom and gloom. Relief policy from Congress, the White House, and the Federal Reserve can provide a "fiscal boost" for US businesses and consumers, Goldman said. The Federal Reserve announced unlimited asset purchases Monday morning to cushion financial markets, and the Senate is poised to introduce updated stimulus measures early this week.
If stimulus arrives "according to plan," the S&P 500 can bounce back to 3,000 by the end of the year and hit $170 EPS in 2021, the analysts said.
The S&P 500 sat at 2,249.75 as of 11:05 a.m. ET Monday, down roughly 30% year-to-date.
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