Goldman Sachs Has A Strategy For Valuing US Stocks

Goldman Sachs Has A Strategy For Valuing US Stocks

almost 4 years ago2 mins

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New analysis from investment bank Goldman Sachs this week may shed light on why US stock prices are still holding up relatively well despite the economic carnage created by the coronavirus 🤤

What does this mean?

As earnings season kicks off in earnest, investors expect US companies to report first-quarter profits 15% lower than this time last year – while the US economy itself is expected to have shrunk by nearly 4%.

But with the chilling effects of the coronavirus not kicking in until the end of that period, second-quarter earnings and economic growth figures are likely to be much worse – with investors predicting a 30% drop on both fronts 😱

Given that US stocks, after initially falling 34%, are currently sitting just 15% below February’s record highs, it may seem that markets are missing a trick. But Goldman thinks otherwise.

The US S&P 500 this year (Source: Markets Insider)
The US S&P 500 this year (Source: Markets Insider)

Historical analysis reveals stock investors typically focus on two years’ worth of economic projections – and with the latest forecasts showing the US due to return to economic growth in 2021 and 2022, Goldman thinks current valuations look justified.

Why should I care?

Not everyone agrees. Rival bank UBS warned on Monday that much – including the duration of the virus’s economic fallout – remains unknown. Many US companies, tech giants among them, are expected to decline to provide second-quarter earnings guidance that could end up far off the mark. One of the few things that is certain is that the ratio of company stock prices to investors’ predictions for their next four quarters of earnings is at its highest level in 15 years.

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Goldman’s analysis suggests investors should focus on longer-term economic growth forecasts. If these are revised downwards, however, then US stocks could well be in for another dip. Even Goldman notes that economists typically downgrade future-year growth expectations when they do current-year ones. Welcome to the new normal… 🤨

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