Will Goldman’s new S&P 500 target hit the mark?
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The news that the COVID-19 vaccine from drugmaker Pfizer
PFE,
and its partner BioNTech
BNTX,
is 90% effective, according to Bernstein Research strategist Inigo Fraser Jenkins, has sent stocks scurrying like “tracks left in a cloud chamber from particles scattering in an accelerator.”
Goldman Sachs strategists, led by David Kostin, say the vaccine is a more important development for the economy and markets than the prospective policies of a Biden presidency. “The divisive U.S. presidential campaign was actually a backdrop to the main event: a public health crisis that has tragically claimed 240,000 lives in the U.S. since it began. However, within less than a year, a vaccine has been discovered,” they say.
The Goldman team boosted its year-end price target on the S&P 500
SPX,
to 3700 from 3600, which isn’t so far away from Tuesday’s closing level of 3545.53. Goldman is also targeting 4300 by the end of 2021 and 4600 by the end of 2022.
The strategists expect the Pfizer vaccine, and possibly others, will receive emergency use authorization by the end of January, and sufficient doses will be available for the U.S. population during the first half of 2021. They increased earnings estimates, mostly reflecting the better-than-expected results for the third quarter. They also are expecting better growth in the U.S. next year than the market does, at 5.3% versus the consensus forecast of 3.8%. A weakening U.S. dollar
DXY,
and slack in the labor market should support S&P 500 sales and margins, they add.
They are not too worried about the weight of the technology giants — Facebook
FB,
Amazon
AMZN,
Apple
AAPL,
Microsoft
MSFT,
and Google owner Alphabet
GOOG,
The S&P 500 would rise 9% if the FAAMG stocks trade sideways and the remaining 495 stocks rise by the historical median 12-month rise of 12%. And the S&P 500 would rise 16% if the FAAMG stocks rise 5% and the remaining 495 climb 20%, which would represent an 80th percentile move based on historical distribution since 1990.
As for the debate about value or growth, the Goldman team likes both. For value stocks, the team noted that Monday was the largest single-day increase in the factor’s history since 1980, while they say growth stocks should continue to benefit from weak trend economic growth and low interest rates.
“When thinking about the potential resolution of today’s record valuation dispersion, investors often recall the unwind of the tech bubble, which was characterized by a two-year bear market and large negative absolute returns of the previous market leaders. More often than not, however, value rallies tend to occur in rising markets during which high valuation stocks also rise but are outpaced by the lowest valuation firms. This ‘catch up’ dynamic is what we expect will take place in coming months as a vaccine is approved and distributed,” the strategists say.
Also read: Here’s what strategists are saying about tech stocks and the rotation into value
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