Goldman Sachs expects gross domestic product growth of 3.8% in 2022, compared with consensus estimates of 2.8%.
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The stock market could continue roaring in the next year because of a powerful combination of Covid-19 vaccines and low interest rates.
The S&P 500 is up almost 11% since Oct. 28, the end of more than a month of market weakness. The rally has included most sectors. Recently, several biotech companies have announced they are almost ready for Food and Drug Administration approval for vaccines.
Still, many on Wall Street see roughly 20% upside on the S&P 500 in just the next year. The thesis of that is built on two broader themes: Vaccines creating near-term earnings momentum and low interest rates keeping valuations elevated.
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Goldman Sachs’ price target on the S&P 500 by the end of 2021 is 4300, representing close to 19% upside from Wednesday’s level. Goldman looks for earnings per share on the index of $195 for 2022, and by year-end 2021, the market will be pricing that in. That earnings number is in line with the consensus estimate and Goldman uses a 22 times multiple on those earnings.
Getting to that earnings number requires that a few things unfold cleanly. The bank expects more than 1.26 billion doses of vaccine to be distributed worldwide by the first quarter of 2021, with more on the way through the year. That should allow for a meaningful portion of the U.S. population to be immunized, which would be a catalyst for aggressive state reopenings, a major positive for hiring and consumer spending.
Also, Goldman recently lifted 2021 and 2022 earnings per share estimates, by 12% for 2022, as companies across sectors beat third-quarter estimates handily. Companies posted a year-over-year EPS decline of 6%, against initial estates of a 21% decline.
Goldman expects gross domestic product growth of 3.8% in 2022, compared with consensus estimates of 2.8%, allowing for 17% EPS growth over 2021. Most expect strong growth in 2021 against an easy 2020 comparison, but “Goldman Sachs Economics U.S. GDP growth forecasts reflect a continued “V-shaped” recovery,” chief U.S. equity strategist David Kostin wrote in a note.
These dynamics all favor value stocks, which are more correlated to changes in the economy than are growth stocks. The FAAMG group— Facebook (FB), Apple (AAPL), Amazon.com (AMZN), Microsoft (MSFT) and Google parent Alphabet (GOOGL)—could rise only 5% next year and the S&P 500 could still rise 16% on the strength of value stocks, Goldman Sachs said. With some FAAMG valuations arguably not so expensive compared with their earnings, and EPS growth expectations of 17% for the next two years, they could still help drive the S&P 500. They represent 22% of the index’s market cap.
Goldman’s multiple on 2022 earnings is a bit elevated, but the firm expects the 10-year Treasury yield to rise only to 1.3% by next year from 0.87% currently. Lower rates increase the attractiveness of stocks, supporting valuation. The Fed’s purchase of tens of billions of dollars of treasuries per week is acting against the economic growth that can lift rates.
Goldman’s estimates reflect an equity risk premium—the extra return investors demand for the risky stocks over the safe 10-year treasury bond—of 3.2%. That is below the current 3.6% premium, but Goldman said investors will be less risk-averse as political uncertainty eases.
JPMorgan Chase strategists have a 4500 year-end 2021 price target, representing 24% upside. One key factor JPMorgan has in common with Goldman: “Expectations of many key risks subsiding (e.g. U.S. elections, pandemic and vaccine news, etc.) clearing the path to a more positive forward outlook,” Dubravko Lakos, JPMorgan’s chief U.S. equity strategist, wrote in a note. Plus, “While has been some upward pressure on rates, central bank policy continues to be accommodative and a major pillar of support for equity multiples. Lakos said a 1.5% 10-year yield would make him less comfortable touting U.S. stocks.
Haveford Trust, a wealth-management firm with $10 billion under management, calls for the S&P 500 to hit $4350 by the end of next year, representing 20% upside. “We will likely see approved, effective and accepted vaccines starting to be distributed in early 2021,” said Hank Smith, head of investment strategy. “This will cause a spike in GDP growth in the second half of 2021 lasting into 2022.”
Downside risks to the thesis: Vaccines see distribution troubles and the Fed indicates it might raise rates as the economy improves.
Write to Jacob Sonenshine at [email protected]
