Stocks have rallied for the last three days, with the Dow posting its largest three-day gain since 1931 adding more than 20%.
For investors hoping this week’s gains are a sign that the market has hit a bottom after falling into a bear market amid the coronavirus crisis, Goldman Sachs has some bad news for you.
The firm said in a note this week that the COVID-19-driven global recession is set to be deeper than the financial crisis, and the market’s response to that has yet to reach the level of “excessive.”
“The coronavirus has created unprecedented financial and societal disruption,” David Kostin, Goldman’s chief U.S. equity Strategist, wrote in a note. “The combination of thin liquidity, high uncertainty, and positioning could cause the S&P 500 to fall below our 2,450 base case estimate of fair value and closer to a trough of 2,000.”
Kostin says that the S&P 500 will likely head back down to 2,450 within the next three months, but also noted that should the economic fallout from the deadly virus deepen, the S&P 500 should bottom at 2,000—or around roughly -24% lower than where the index is now—by midyear, marking a -41% decline from the index’s record high reached just last month.
In another note, Goldman’s economics research team, led by Kamakshya Trivedi, warned investors to stay cautious and defensively positioned in risk assets.
Trivedi said that while the market has bounced in reaction to policy support from the Fed and the Senate passing an historic $2 trillion stimulus package, the conditions needed for a market bottom haven’t been met yet.
“But it is also easier to imagine how those conditions might be met in the weeks ahead than it was even a week or two ago,” Trivedi said.
The team said that for markets to bottom, two crucial conditions will need to be met: the stabilization or flattening of the infection rate in the U.S. and Europe as well as visibility on the depth and duration of disruptions to the economy.
At the beginning of the month, the U.S. reported just 100 COVID-19 cases. Last week, that figure had risen to 5,000. By this Thursday, the U.S. surpassed the number of cases seen in China and Italy, confirming more than 85,000 cases of the coronavirus.
As for duration, while President Donald Trump has said he wants the U.S. economy back up and running by Easter, health experts have warned that opening things up prematurely is likely to result in a spike of new cases. And further still, Dr. Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases, said that it’s likely we’ll see a second outbreak in the Fall as the coronavirus becomes a “seasonally cyclic” disease, which would cause a second round of economic disruptions.
The team added that for the market to bottom, there will need to be“sufficiently large global stimulus” and mitigation of funding and liquidity stresses, as well as “deep undervaluation” across major assets.
While the Senate passed its $2 trillion stimulus package yesterday, the third stimulus bill in mere weeks, and the House is expected to pass the bill tomorrow before sending to Trump for signature, lawmakers and economists are already saying that there will need to be further stimulus, and the House is already beginning work on a fourth bill.
But it’s not all bad news.
While Goldman Sachs has downgraded its per-share earnings forecast for the S&P 500 twice in less than two weeks and now says it expects “extreme weakness” that will peak with a 15% drop in the second quarter, the firm also expects a speedy rebound in earnings once we’re out of the woods. A rebound that will propel stocks higher.
“The lesson of prior event-driven bear markets is that financial devastation ultimately allows a new bull market to be born,” Kostin wrote.