Economic growth in US is peaking and that means stocks could struggle this year, Goldman warns

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Topline

As the economic benefits of a massive fiscal stimulus and corporate reopening peak in the coming weeks, Goldman Sachs analysts warn that U.S. economic growth will slow, leading to “paltry” stock returns over the course of the year. next year and at the end of the massive market pandemic. rally.

Highlights

US economic growth will peak over the next two months, Goldman analysts said in a Thursday morning note, predicting gross domestic product to grow by an annualized rate of 10.5% in the second quarter, the biggest expansion since 1978 outside of the pandemic rebound in the third quarter of last year.

Economic growth will “slow slightly” in the third quarter and continue to decelerate over the next few quarters, analysts predicted, adding that such deceleration is generally associated with lower stock returns and greater market volatility.

A sign that fiscal stimulus effects and economic activity are peaking, the ISM Manufacturing Index, a monthly economic indicator measuring industrial activity, recorded at 65 in March – above the 60 threshold which Goldman says generally represents a peak in economic growth.

According to Goldman, the S&P 500 has historically fallen an average of 1% in the month after the ISM Manufacturing index hit over 60, and over the next 12 months it gained a “paltry” 3% – significantly less. than the 14% annualized return over the past 10 years.

Goldman expects the S&P to end the year at 4,300 points, implying only a 4% increase from Thursday’s close, less than some other market forecasters who expect the S&P to end the year at 4,300 points. The index reaches 5,000 points by the end of the year.

Crucial quote

“Stocks often struggle in the short term when a strong rate of economic growth begins to slow,” a group of Goldman strategists led by Ben Snider said Thursday, noting this over the past 40 years. “It is no coincidence that ISM readings have rarely exceeded 60 in recent decades; investors who bought US stocks during this time were buying stocks around the time when strong economic growth was peaking. – and started to slow down. “

Surprising fact

The most recent ISM reading is the highest since a level of 70 in December 1983, after which the S&P rose only 0.2% over the next 12 months.

Key context

Billions of dollars in unprecedented fiscal stimulus during the pandemic helped take the stock market to new heights over the past year, and although the president’s $ 2.3 trillion infrastructure plan Joe Biden could add even more fuel to the economy, Anu Gaggar, senior investment analyst for Commonwealth Financial Network, said Thursday that “investors quickly recognized [that] much of the increase has already been assessed. “This is evidenced by the growing divergence in performance between the broad market and growth stocks this year,” said Gaggar, echoing the sentiment of Goldman analysts on Thursday. by about 9% this year, underperforming the S&P and the Dow Jones Industrial Average, which are up about 12% each.

Further reading

The S&P 500 goes to 4000 and these market experts believe it can continue to climb higher. Here’s why. (TBEN)

Dow jumps 200 points: Stocks push back third day of losses despite biotech, Netflix crash (TBEN)

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