In early November 2020, noted investment bank Goldman Sachs released a 39-page report outlining its predictions for everything from the economy and monetary policy to the stock market and the Georgia Senate runoff elections. The good news for investors is that Goldman sees continuing new highs in the stock market.
This main prediction is based on Goldman’s view that a coronavirus vaccine will be readily available by mid-2021 and that another round of government stimulus will be announced. These developments, among others, should help prop up the economy, the consumer and, by corollary, the stock market.
There are some cautionary notes in the Goldman Sachs report, and predictions being what they are, none of these are set in stone. Delays in vaccine distribution, the lack of a stimulus package or a change in course by the Federal Reserve are some of the main risks. However, the overall view coming out of Goldman is fairly rosy, and investors might want to position themselves to benefit from the forecasted trends. See what else the company said about the future.
GDP Will Grow 5.3%
Goldman Sachs has an estimate for the U.S. economy to grow 5.3% in 2021, which is far above the Federal Reserve’s own more modest 4% projection. That’s a pretty significant number, and it has wide-ranging ramifications. With growth that high, it means that corporate America is doing great, and that should give further fuel to the stock market. Generally, a rising gross domestic product also means a solid economy all around, meaning Main Street America should also have extra money to spend. Coming out of the coronavirus recession, this is excellent news.
Unemployment Will Fall To 5.3%
Just like Goldman Sachs predicted U.S. GDP to rise to 5.3% in 2021, it also expects unemployment to fall to the same 5.3% rate. The prognosis from Goldman is that as the economy recovers, hiring will follow, continuing to push down the unemployment rate. Goldman cautions, however, that this is contingent on the passage of some type of stimulus plan, likely in the $1 trillion to $2.5 trillion range.
The Fed Won’t Raise Rates Until 2025
The Federal Reserve Board has a remarkable influence on stock markets. In fact, what the Fed says and does is so influential that some pundits have labeled it as market manipulation. When the Fed lowers rates, it frees up the money supply and helps prop up the economy. Low rates make it cheaper for individuals and businesses to borrow money, which typically leads to greater investment and ultimately profitability.
Currently, the Fed Funds rate is near zero. This has helped the economy to greatly expand over the past few years, helping to lead to record levels in the stock market. The unusually low rates have also no doubt helped the burgeoning recovery in 2020.
Goldman Sachs sees the Fed holding rates near zero all the way out until 2025. This prediction is based on the Fed’s own announcement that it would not raise rates until inflation is consistently above 2%. This could have huge ramifications for both the stock market and the economy at large, likely in a positive way.
A Divided Government Will Help the Market
It might seem logical that the stock market would love a Democratic Congress that could back Democratic President-elect Joe Biden and move the country forward. However, when it comes to the stock market, the opposite is actually true.
Under a divided government, it’s hard for the party occupying the White House to push through its full agenda. In fact, a divided government makes it much more likely that not much happens at all. While this may not be great for the country as a whole, there’s nothing the stock market hates more than uncertainty. With a divided government, the status quo is much more likely to be maintained.
If Republicans win the two runoff races for Georgia senator in January, Goldman Sachs feels that could be a good thing for the stock market. According to Goldman, since 1928, the S&P 500 has returned 10% annually under a divided government, a return that exceeds those achieved when a single party controls the government.
The Stock Market Will Rise 19% by the End of 2021
In spite of a huge selloff in March, the bull market has been raging in 2020, with stocks making new all-time highs in November and December. This has raised cautionary flags with some analysts, who worry that the valuation of the market is getting too high.
Goldman Sachs is decidedly not in that camp. In fact, the firm sees the S&P 500 jumping to 4,300 by the end of 2021. That equates to about a 16% gain from where the S&P 500 closed on Dec. 4.
Part of this is based on Goldman’s own expectations that the Fed will not raise rates until 2025. Additional gains are anticipated to come from a significant jump in corporate profits, which help fuel stock prices.
The Stock Market Will Rise an Additional 7% in 2022
Investors with big market gains in 2020 no doubt enjoy the sunny outlook for stocks that Goldman Sachs has for 2021. But, that’s not all they have to look forward to. According to Goldman, the trends that should drive market gains in 2021 will not expire in December of that year. Rather, Goldman sees the S&P 500 tacking on an additional 7%, to 4,600, by the end of 2022. Combined with the gains Goldman sees in 2021, that means that market participants should look forward to net gains over the next two years approximating 24%.
Longer-distance forecasts are necessarily less reliable, but the Goldman prediction seems to stand on solid footing. With the Fed on hold for the foreseeable future and the possible economic stimulation put into place by the new Biden administration, the panacea of rising corporate profits with low interest rates looks likely to be unchanged in 2022 as well.
Corporate Earnings Will Grow 30% in 2021
Goldman’s predictions of big gains in the stock market in 2021 aren’t just idle chatter. While every firm likes to post optimistic outlooks for its clients, Goldman is basing its call on real-world numbers. And when it comes to stock market gains, the biggest driver is usually corporate profits.
Even though the market has set new highs in 2020, Goldman sees further gains in 2021 due to an earnings explosion. According to Goldman analysts, companies in the S&P 500 are expected to report a record earnings-per-share of $175. This amounts to a year-over-year gain of a whopping 30%.
Certainly, some of those huge gains are coming on the back of disappointing corporate reports during the midst of the coronavirus epidemic in early 2020. Even still, this type of corporate earnings growth would be impressive, and it would underpin the bullish Goldman prediction of big gains in the stock market in 2021. In terms of specific industries, Goldman feels that technology, consumer-discretionary and materials sectors should show outperformance.
FAAMG Will Continue To Surge
If you’re looking for specific stock recommendations out of Goldman Sachs, look to FAAMG. The acronym stands for five top-performing stocks in the tech sector, specifically Facebook, Apple, Amazon, Microsoft and Google, now known by its parent company’s name Alphabet.
According to Goldman, “Fundamentals support higher valuation for FAAMG.” Specifically, Goldman says that these types of mega-cap tech companies offer longer duration, which is favored in a low interest-rate environment. With rates staying low until 2025, according to Goldman, the FAAMG stocks should continue to prosper. Goldman also says that these companies have high near-term growth and low leverage, adding to their appeal.
The Recovery Will Get Worse Before It Gets Better
The Goldman Sachs predictions are not all sunshine and rainbows, however. Although Goldman Sachs ultimately sees a growing GDP, declining unemployment and a rising stock market, the firm predicts that things will get worse before they get better. According to Goldman, “Fiscal support has largely dried up for now, leaving disposable income lower in the final months of the year.”
Many Americans were hoping for and even expecting a second $1,200 check to arrive in the mail in summer or fall, but as of early December, no stimulus plan has passed. In addition to the lack of direct payments, this means Americans haven’t benefited from increased unemployment payments or any other financial help, resulting in the lower disposable income Goldman references.
The Third Wave of Coronavirus Will Worsen in Winter
Part of the reason Goldman Sachs predicts a slowdown before improvement in the economy is due to the lack of stimulus. However, that’s not the greatest risk, according to the firm. Goldman feels that “the largest risk is that the third wave of the coronavirus is likely to worsen with colder temperatures.”
That Goldman Sachs prediction is already bearing fruit, as early December cases are skyrocketing across the country. This will no doubt delay the full recovery and may even result in a double-dip recession before things turn better in late 2021.
Stimulus — and a Vaccine — Are Everything
A common theme runs through most of these Goldman Sachs predictions for 2021 — a stimulus package and a vaccine are critical. The two of these factors combined would have a huge impact on the economy and the stock market. With a vaccine, businesses could open up a return to normal, fueling a hiring boom and increased earnings. With a stimulus package, businesses will have an additional lifeline and consumers will have increased money in their pockets, contributing to greater spending, rising corporate profits and a growing economy. Net-net, these factors will help bring about the rising stock market and lowering the unemployment rate that Goldman Sachs foresees.
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