The stock market has probably found a floor and its price action suggests a sharp economic recovery, according to Goldman Sachs.
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Investors are pricing in the possibility the worst of the COVID-19 pandemic is behind us and that the extraordinary measures policymakers have taken to support the economy are working.
“The Fed and Congress have precluded the prospect of a complete economic collapse,” David Kostin, chief U.S. equity strategist at Goldman Sachs, wrote in a note sent to clients Monday. “These policy actions mean our previous near-term downside of 2,000 is no longer likely.”
The benchmark S&P 500 had rallied 25 percent off its March low through last week’s close of trading and was just 18 percent below its all-time high. The index had plunged by 34 percent off its Feb. 19 high amid fears the pandemic could spiral the U.S. economy into a depression.
The growth rate of the number of COVID-19 cases in New York, the epicenter of the country’s outbreak, appears to be slowing and models are suggesting the number of deaths that will be caused by the virus has been revised lower, Kostin noted.
He also pointed to the “numerous and increasingly powerful policy actions” taken by both the Federal Reserve and Congress.
The central bank slashed interest rates to near-zero, promised to buy unlimited amounts of Treasury securities and put into place a number of lending facilities to backstop the financial system.
Meanwhile, Congress has passed three phases of aid relief, including the $2 trillion CARES Act, which provides cash for the individuals and businesses most severely impacted by the sharp slowdown in the economy. A fourth phase is currently under consideration.
“If the US economy does not experience a second surge in infections after the economy reopens, the ‘do whatever it takes’ stance of policymakers means the equity market is unlikely to make new lows,” Kostin wrote, adding that his year-end S&P 500 target “remains 3,000.”
Goldman isn’t the only Wall Street bank to suggest the market has likely bottomed. Last week, Mike Wilson, chief U.S. equity strategist at Morgan Stanley said he doesn’t “think we will have a full retest of the lows.”
Wilson isn’t quite as bullish as Kostin. His year-end target for the S&P 500 is 2,700.