Goldman is less gloomy in wake of Wall Street rally

Louis Ashworth
Wall Street - JOHANNES EISELE/AFP via Getty Images

An “unloved, but welcome” rally in US stock markets has forced Goldman Sachs analysts to revise their worst-case scenario for Wall Street shares over the coming months.

The investment bank’s analysts said they were surprised by the “magnitude and persistence” of a 35pc rebound in the benchmark S&P 500 from the bear market low it hit in March.

Led by chief US equity strategist David Kostin, the analysts said the S&P 500 is now trading at around 3,000 points - their target for where it would end 2020 following a later recovery.

It means a previous prediction the index would fall to 2,400 points within three months now looks unlikely to come true, they said in a note to clients.

The analysts said that a giant wave of government spending, money-printing and interest rate cuts released in response to Covid-19 has limited the potential floor for the S&P 500 – one of the world’s most closely tracked indices – over the coming months at 2,750, with the potential for the index to hit 3,200 if sentiment improves and a recovery gets going.

The rally in top US stocks over the past two months has been driven by stimulus, a flattening virus curve in America and optimism over steps to re-open the economy, the analysts wrote.

They added that the buoyant performance is also partly explained by the dominance of Silicon Valley’s tech titans, whose share prices have shrugged off the impact of widespread lockdown measures. 

Warning the index’s total return “overstates the performance of the typical stock”, they noted that the current aggregate weight of the five biggest S&P members by value – Microsoft, Apple, Amazon, Google-owner Alphabet and Facebook – is the highest in history at 20pc.

Those big five tech stocks are up around 15pc since the start of 2020, while the index as a whole remains in the red.

The analysts warned the five companies’ dominance may be approaching a limit, writing that 25pc could prove to be the maximum achievable due to rules which require many portfolio managers to hold a wide range of investments.

They said: “Broader participation in the rally will be needed in order for the aggregate S&P 500 index to climb meaningfully higher."

However, not all of Wall Street is united in seeing an improved road ahead.

JP Morgan’s Marko Kolanovic warned last week that rising political tensions between the US and China could increase pressure on stock prices by delaying the recovery of global trade.

He said: “We are dialing down our positive outlook on equities and would like to see these political risks show signs of normalisation."

Bank of America analyst Athanasios Vamvakidis said the market was “pricing the end of Covid-19 at some point next year”,  with a ‘U-shaped’ recovery in output similar to what followed the financial crisis.

He warned that several major risks could delay the recovery - a resurgence in infection rates as countries re-open; a more ponderous rebound in output than expected; and high levels of private and public sector debt weighing on growth.

Mr Vamvakidis said: “For now, the risk rally seems to be accelerating and it is hard to catch a falling knife.

“However, we remain cautious in our forecasts and positions for the second half of the year. What would change our views is a vaccine/ cure for Covid-19, or if for some reason infection rates continue falling despite economies opening up.”