Why Goldman Sachs Says The Market Is In For An 16% Drop Soon

•  May 14, 2020

Pessimism is soon to take over the FOMO that has been driving the market higher since the March bottom. Here’s why. 

As cases of the coronavirus climb to more than 1.4 million in the U.S. and jobless claims rise past 36.5 million since the start of the coronavirus crisis, many are scratching their heads over why the market has been rallying higher amid the worst economic picture seen since the Great Depression.

Goldman Sachs said this week that FOMO, or the Fear Of Missing Out, is what has been driving the market higher. That FOMO appears to be overshadowing the fear of all that’s wrong with the economy.

However, Goldman believes that pessimism will soon take over the market, sending the S&P 500 down nearly 16% over the next three months. 

Goldman chief U.S. equity strategist David Kostin wrote in a report this week that even as fiscal and monetary policy support has helped ward off a full blown financial crisis amid the pandemic, a return to normalcy is still a long way off and investors have gotten ahead of themselves.

“The ‘fear of missing out’ best describes the thought process,” Kostin said as investors feel pressure to chase the recent rally, while warning that it’s a risky move.

“Skepticism abounds regarding the likelihood the rally will continue,” Kostin wrote.

“In six weeks, as the S&P 500 index has soared by 30%, investors have raced from despair at the market bottom to optimism about the economic restart,” Kostin wrote in a note to clients. “A single catalyst may not spark a pullback, but concerns exist that we believe, and our client discussions confirm, investors are dismissing, including $103 billion in expected bank loan losses in the next four quarters, lack of buybacks, dividend cuts, and domestic and global political uncertainty.”

Goldman expects the S&P 500 to drop to around 2,400 over the next three months before rebounding to around 3,000 by the end of 2020. 

Kostin noted that one of the biggest risks moving forward is that investors have been too optimistic that the COVID-19 epidemic in the U.S. has been contained. 

“While New York has thankfully been able to flatten the curve and the rate of growth of new cases has decelerated, new infections in the rest of the U.S. are increasing,” Kostin wrote. “Cases of infection may accelerate as states begin to relax shelter-in-place rules.”

He also warned that “the restart process will take time,” noting that company conference calls with analysts indicate that many executives are predicting a slow recovery to pre-coronavirus crisis profit levels. 

Aside from the domestic picture, Kostin added that “investors may need to contend with another twist in U.S.-China trade and strategic developments, which was at the forefront of investor concerns for much of 2019. The nature of the tension seems multifaceted, going beyond conflicts in merchandising and service trades, with the U.S. administration’s rhetoric and actions towards China turning more hawkish in the past month across various issues and strategic domains.”