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The firm believes S&P 500 earnings will be boosted by a sharp rebound in sales and expanding profit margins as the economy recovers and investor confidence gains momentum.
“A falling equity risk premium will outweigh a rise in bond yields and combined with our above-consensus EPS forecast, will lift the S&P 500 index to 3,600 by year-end (+7%),” wrote a Goldman team led by Chief U.S. Equity Strategist David Kostin, who had a previous target of 3,000.
The S&P 500 has battled into positive territory for the year, up 4.4% through Friday, after the COVID-19 pandemic induced a 34% plunge in the 23 trading days following the Feb. 19 record high.
The S&P 500's comeback has been supported by the Federal Reserve cutting interest rates to near zero and unprecedented stimulus on both the fiscal and monetary policy fronts designed to support the economy through the pandemic. The firm believes the Fed’s balance sheet will swell by another $800 billion this year and another $1.3 trillion in 2021.
Goldman’s economists expect at least one COVID-19 vaccine will be approved by the end of this year, putting the U.S. economy on track to grow 6.4% in 2021, better than the 3.9% growth expected by the consensus. Kostin sees the S&P 500 reaching 3,800 over the next 12 months.
While the 2020 election remains a “significant risk” to Goldman’s forecast -- a Biden win could result in higher corporate tax rates -- the virus remains front and center.
“The largest risk to our forecast is the timing of a vaccine and path of recovery from the pandemic,” Kostin wrote.