Goldman Sachs paints a rosy picture of 2021 for us. Goldman Sachs, an investment bank, in early November, published a 39-page report that delineated predictions about the US economy, monetary policies, Georgia Senate runoff and, the stock market.
Like for every prediction report, certain assumptions are kept in mind that backs the base for predictions. These assumptions, if not fulfilled, will adversely affect the results of these predictions.
Goldman’s predictions are strongly based on the views:
Coronavirus vaccine would be available by January with enough doses available to vaccinate the American population by the first half of the year.
The government will announce another stimulus package
Federal Reserve won't raise the rates
There are several cautionary notes that one must read before reading the report. But, overall, Goldman Sachs has predicted an optimistic outcome and investors might want to take advantage of the trends anticipated.
The Federal Reserve's modest projection of the US's GDP is 4% whereas Goldman estimates that GDP will see a surge of 5.3% in 2021. That's a considerably high number compared to the Federal Reserve, pointing to several ramifications. High Growth or Rising GDP implies that:
American Corporates are doing phenomenal which in turn, should fuel the stock market
A strong economy all around, indicating that Main Street would have extra money to spend.
Goldman expects a V-shaped recovery of the economy. This is terrific news as we are all trying to come out of the coronavirus recession.
Goldman Sachs has also published a similar Macro Outlook Report on India. To read the official India’s Macro Outlook 2021, click here
Just as GDP, Goldman also expects the unemployment rate to plunge to 5.3%. Goldman Sachs forecasts that as the economy recovers, the hiring will resume, decreasing the unemployment rate. However, this is contingent upon the stimulus package boost from the government. With the blue waves taking over the elections, it is expected that a fiscal stimulus package of $1trillion will be authorized, potentially before Biden’s inauguration on January 20.
The central bank of every country has a significant influence on the stock market. And so does the Federal Reserve. Everything Fed says manipulates the market to a tremendous extent as the money supply in the economy is affected by its decisions.
Based on Fed’s announcement that it won't raise rates until inflation is consistently above 2%, Goldman expects that the Fed won't raise the rates until 2025.
Currently, the Funds rate set by the Fed is near zero and Goldman expects the Fed to keep it so until 2025.
These unusually low rates have assisted the economy to expand over the years and set records in stock markets just like it helped the recovery in 2020.
If this prediction comes true, it will have a huge impact, from the macro point of view, on the economy and the stock markets.
The bull market has been storming in 2020, with stocks making all-time new highs in November and December after huge selloffs in March. This has cautioned many analysts as the valuation of the market is getting too high.
Well, Goldman seems to be on the other side of the road as the firm expects S&P 500 to jump to 4300 by the end of 2021.
This forecast is partly based on Goldman's above prediction that the Fed won't raise rates until 2025.
To read the official redacted version of the Macro Outlook 2021 original report, click here
Investors with massive gains in 2020 naturally have optimistic expectations for 2021. But, according to Goldman, the market trends of 2020 will not stop providing gains in that year. Rather, Goldman expects an additional rise of 7% in the S&P 500 by the end of 2022.
If we go with the gains predicted by Goldman in 2021, the market participants should be looking forward to a total net gain of 24% over the next two years.
Generally, such long term forecasts have lower reliability. Although, with the Fed rates on hold for a foreseeable future and with the proposed economic stimulus by the Biden government, the rise of economic profits with low-interest rates is likely to remain unchanged in 2022 too as per Goldman Sachs.
With the exceptional gains prediction in the stock market, it's stupid to not see an increase in corporate profits. The primary factor of stock market gains is corporate profits without any doubt.
Despite the fact that the stock market has set new highs in 2020, revenue outbreaks will result in further gains in 2021 as per Goldman.
Goldman analysts expect the companies in the S&P 500 to report an EPS of $175 which would result in an enormous year-over-year gain of 30%.
Amidst the coronavirus epidemic, huge losses that corporations reported in 2020, such corporate earnings if reported, would be impressive and pave the path for Goldman’s stock market bullish predictions in 2021.
To point out specific industries, the Technology, consumer-discretionary, and materials sector would outperform as per Goldman.
FAAMG is an abbreviation coined by Goldman Sachs for Facebook, Amazon, Apple, Microsoft, Google stocks which are the top-performing stocks in the tech sector.
According to Goldman, “Fundamentals support higher valuation for FAAMG.” Goldman explains that such mega-cap tech companies offer longer duration which makes them favored in a low-interest rate territory for obvious reasons.
With that being said, and Fed keeping rates low till 2025, there's no reason why FAAMG stocks wouldn't continue to prosper. Goldman also states that “These companies have high near-term growth and low leverage, adding to their appeal.”
After being in the dreamy world so far, Goldman Sachs also tints us with reality.
The firm predicts that things will get worse before it gets better since the financial support has largely dried up as of now. This has resulted in lower disposable income in the last months of the year.
Americans were expecting for a second $1,200 check to reach in the summer or fall in their mails. But as of December, no stimulus plan has been enacted. Lack of benefits from increased unemployment payments or any financial help at all has left them with lower incomes at their disposal that Goldman was referring to.
Goldman feels that the major risk is the third wave of coronavirus which is expected to worsen in countries with colder temperatures.
This prognosis of Goldman Sachs is already blossoming with the huge rising in the coronavirus cases in early December across the country. This will not only delay the full recovery process of the economy but might result in a double-dip recession before things can get better in late 2021.
To summarise, fiscal stimulus packages and a vaccine is all we need to get out of this economic crisis.
The vaccine will work as a lifeline for businesses to surge back to their normal, defreeze hiring, decrease unemployment, increase earnings. Whereas the stimulus package will work as an aid for businesses progression and consumers will have enough money to spend on more than just necessities, increasing corporate profits and overall contributing to a growing economy.
Altogether, these factors will result in a rising stock market and less unemployment as the Goldman Sachs Report anticipates.
Let us know your views in the comment section below.
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Ayushi is currently pursuing Chartered Accountancy. No secrets there that she loves to read! She believes words have the power of healing and is a medium that can convey like no other. She hopes to connect with people through her empathy, thoughtfulness, and by adding value to their lives.