Eq: Large Cap
The annual next-year forecast cycle for Wall Street’s investment banks is in and some of the findings are interesting. As usual, banks are fairly bullish. However, that was certainly not automatic this year given the huge tumult in markets in 2020. One particular forecast stood out—Goldman Sachs. The bank’s research team, led by David Kostin, has its official 2021 S&P 500 price target as 4,200, or just about 14% ahead of today. Interestingly, the bank also thinks gold is going to rise strongly, from the mid 1,800s today to 2,300. According to Kostin, “On absolute metrics like price/earnings...the market is very expensive relative to its history, in the 90th percentile or greater … But relative to interest rates, the stock market is somewhat attractively valued. Those are two different stories—absolute valuation versus relative valuation”.
FINSUM: As tough as it is to swallow on a historical basis, we think the interest-rates measured basis for current valuations makes a great deal of sense.
Goldman Sachs went on the record with a bold call last week. They told investors that despite all the fears in the market, a big correction WAS NOT coming. Alessio Rizzi and his team at Goldman say that many indicators are showing a bullish outlook, and that big losses don’t seem likely. According to Rizzi, “more moderate risky asset returns are likely from here, rather than an imminent risk of a sizable correction”. One indicator Goldman cited as very bullish was the ratio between puts and calls. Right now the market is deeply favoring calls, with the ratio nearing the limits of its normal distribution.
FINSUM: So bulls look at this and say “aha, I’m right, the market will rise”; and bears say “exactly as expected, this is a contrarian indicator”! In our opinion, on the whole, there is plenty to be optimistic about.
New jobless data was released this morning and it took the market by surprise. Economists had been calling for new jobless claims to stay around the level of recent weeks—something around 695,00. But what happened was quite eye-opening: they came in at 853,000. The losses show that the economy is starting to feel renewed impacts of the surge in COVID cases. According to a job market expert, “Job destruction has not come to an end … We might be gaining jobs overall, but thousands of people are losing their jobs every week because demand has not returned”. Markets dipped on the release.
FINSUM: This is worrying for the economy. Hard to say if this trend will continue, but certainly not the direction markets have been predicting the economy would be heading.
One of the big annual market traditions has begun: banks and their analysts put of their year-ahead forecasts. This year has seen a wide range of forecasts, but one thing is becoming apparent—analysts are bullish, and more so than usual. Jefferies has the most aggressive forecast, saying the S&P 500 will close 2021 at 4,250; it is at 3,662 now. Analysts are bullish because of the coming vaccine and central banks which will continue to be accommodative. However, Barclays adds a third consideration—that the economy is doing much better than anyone thought it would be at this point. According to Barclays “with central banks set to remain accommodative for several years, a likely drop in global trade tensions, and unappetizing fixed income returns, we remain overweight risk assets over core bonds”.
FINSUM: Yes valuations are high, but given the overall economic position the US is in (including the vaccine), it is hard not to be optimistic.
The market has been doing very well since October 30th, up around 9%. Goldman thinks even bigger gains are coming for the S&P 500. The bank has been encouraged by investors’ response after the election and thinks that the vaccine is really in the driver’s seat. The bank’s research team has significantly upgraded their earnings forecasts for next year and 2022 based on the better-than-expected recovery. According to Barron’s, a few assumptions underpin Goldman’s outlook, “at least one vaccine becoming widely available in the U.S., less drastic changes in policy because Congress is most likely to be divided, and the continued V-shaped economic recovery”. Goldman’s official forecast for the S&P 500 at the end of 2022 is 4,300 and a 20% gain from now through the end of 2021.
FINSUM: The “continued v-shaped recovery” is the most volatile aspect of these assumptions, but they also discounted a potentially positive one—another stimulus package. The forecast seems reasonable.
The stock market is going to enter a new era as Joe Biden—in all likelihood—becomes president. As that happens, investors need to start thinking about how to align their portfolios. While all industries will likely be affected to some extent, there are a handful that might be impacted the most acutely, such as energy, autos, tech, manufacturing, agriculture, banking, pharma and healthcare. In autos, Biden’s push for more efficiency will likely benefit Tesla and GM, both of whom are looking to sell more electric vehicles. Tech looks like a real risk area as the chances for more data/anti-trust regulation look higher, though those could be somewhat mitigated by a red Senate. On the manufacturing front, Biden is expected to use government stimulus to boost domestic manufacturing, In banking, executives are bracing for more regulation, but changes are not expected at a fast pace, so nothing too shocking seems likely in the near-term. Pharma looks vulnerable as Biden is committed to bringing drug prices down; that said even Pharma companies don’t expect that Democratic policies will hurt their margins worse than Trump’s proposals. In insurance and healthcare, the picture is mixed. Insurers would almost certainly be challenged by increasing amounts of government coverage, but hospitals would likely benefit from providing care for millions of newly insured Americans.
FINSUM: Biden and the Democrats’ plans will reverberate through the market in the coming months, though not as much as they might if the Left grabs control of the Senate in January. Generally, we agree with that a divided government would be most beneficial to markets.