(Business Standard) As the Dow Jones Industrial Average (DJIA) and the S&P 500 sank into a bear phase with the indices plummeting over 5% each, analysts at Goldman Sachs expect a new ‘bull market’ will be born later this year.
Typically, a stock or index is said to be in a bear phase if the benchmark extends its decline to 20%. The DJIA has slipped 20.3% from its February 12 high, while the S&P 500 has shed 19.04% from the February 19 record high.
“The current bull market ranks as the longest in history. It started on March 9, 2009 at 677 and just celebrated its 11th anniversary. A new bull-market will likely be born later this year,” wrote David J. Kostin, chief US equity strategist at Goldman Sachs in a recent co-authored report.
The basic debate regarding the path of US equities in 2020, according to Goldman Sachs, involves whether coronavirus (COVID-2019) will lead to a proverbial “V-shaped” or “U-shaped” downturn. Uncertainty around the impact the virus is having and will have on business and consumer spending is heightened, which according to Goldman Sachs, has led to the volatility in recent weeks.
“Most investors expect COVID-19 will become widespread but disagree about how long the disruption will persist. The corresponding forward P/E multiple would equal 14x and the S&P 500 would trade at 2450. This would represent a 15 per cent decline from the current level and a 28 per cent drop from the all-time high,” the Goldman Sachs report says.
Earnings downgraded
Meanwhile, the global broking and research house has cut its earnings estimates for the S&P 500 further. On February 27, Goldman had cut its 2020 S&P 500 earnings per share (EPS) estimate to $165 (from $174), reflecting flat earnings growth.
“Our revised 2020 EPS estimate is $157 per share, representing a decline of 5 per cent versus 2019. Drivers of our reduced EPS estimate include lower crude oil prices that reduce energy company profits; lower interest rates that squeeze net interest margin (NIM) for financials; lower volume of business activity and reduced consumer spending that curbs revenues for companies across many industries. This is underscored by reduced or withdrawn sales and earnings guidance from a number of Information Technology firms, a sector that contributes nearly 20% of aggregate S&P 500 EPS,” Kostin said.
On a quarterly basis, they expect EPS growth of -3% in the first quarter of the financial year 2020-21 (Q1FY2021), -15% in 2Q, -12% in 3Q and +12% in 4Q. Quarterly consensus bottom-up year-on-year growth rates stood at 0%, +3%, +8% and +11%, respectively.
