- S&P 500 earnings will contract by 5% in 2020, Goldman Sachs projected on Wednesday, snuffing out the bull market’s most efficient driver.
- The bank cited lower oil prices from the new market conflict, diminished corporate guidance, and slashed interest rates for its downward revision.
- Goldman analysts estimated 0% profit growth just weeks ago, but said in its Wednesday note the virus’ intensifying risks and the oil-price war create new downward pressures.
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The stock market’s biggest driver will fade away in 2020 and risk ending the historically long bull run, according to Goldman Sachs.
The real economy and financial economy alike are staring down “acute signs of stress” from the coronavirus outbreak and oil-market conflict, analysts at the bank wrote Wednesday. Goldman expects S&P 500 earnings — stocks’ biggest boon in the 11-year bull market — to contract by 5% in 2020. Such a drop would notch equities’ first year-over-year profit decline since 2015.
Lower oil prices, corporate forecasts, and interest rates serve as the three drivers behind the investment bank’s downward revision. Stocks faced decade-high pressure on Monday as the kindling of an oil-price war between Russia and Saudi Arabia added to ongoing coronavirus worries. The commodity battle has only intensified since, ratcheting up risks for the energy sector.
The coronavirus’ economic risks continue to escalate as the outbreak spreads globally. Weekslong factory shutdowns in China created a supply shock around the world, and growing quarantine activity now endangers demand. Lower interest rates will add to the decline by squeezing financial firms’ net interest margins, Goldman said, while a broad slowdown in consumer demand threatens companies across almost all sectors.
“The new year started with such promise,” the team of analysts wrote, referencing the phase-one trade deal between the US and China. “But since then, the outbreak of the coronavirus in Wuhan and containment in China disrupted the supply chain for many US corporations across industries ranging from Information Technology to Industrials to Consumer Discretionary to Staples.”
The bank had lowered its S&P 500 earnings-per-share forecast to $165 just weeks earlier, forecasting a pause to profit growth through the year. The Wednesday update signals the rapidly developing market risks are just as quickly dragging on profit expectations.
Goldman expects earnings growth to “collapse” in the second and third quarters of 2020 before rebounding through the end of the year and into 2021. The S&P 500 will bottom out at 2,450 in the middle of the year, roughly 15% lower than its current level, the analysts projected. The fresh low will give way to a fourth-quarter surge and push the benchmark index to 3,200 by the end of 2020, they added.
The bank maintained its overweight rankings for the real estate and information technology sectors as economic risks intensify. The energy, financial, health care, and consumer sectors remained underweight, the analysts wrote.
The S&P 500 closed Tuesday at 2,882.23, down about 10.5% year-to-date.
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