Due to the uncertainty caused by the pandemic, investors bet on 2021 profit expectations. But stocks do not always follow forecasts. Goldman Sachs selected 10 papers, which began to cost unreasonably cheap
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Investors increasingly believe that the global economy can recover quickly after the completion of the coronavirus pandemic. That is why they actually ignore the sharp decline in corporate profits in the current year’s reports, focusing on profit expectations in 2021, says Goldman Sachs analyst David Costin.
The uncertainty that prevails in the market since the pandemic began has dramatically changed stock prices and consensus forecasts for them, Kostin notes. “Three months after the February maximum, the S&P 500 index fell by 14%, and the forecasts for index earnings for 2021 fell after the market reached the bottom by 16%,” Goldman Sachs calculated.
There was a significant discrepancy between the stock price and the profit expected to be there next year. Therefore, Kostin advised investors when making an investment decision “to focus on specific stocks, not the index.”
The analyst studied data from February to May about how expectations for the profit of securities from the S&P 500 index changed in 2021. The expert also looked at how much the change in price corresponded to the change in the forecast for stocks.
This helped him to identify companies whose stocks were selling more actively than expected. Now these shares are much cheaper than their fair value:
- HP Inc.
- Cincinnati financial corp.
- Simon Property Group Inc.
- Nordstrom Inc.
- Gap Inc.
- TechnipFMS
- Howmet aerospace
- L brands
- ONEOK Inc.
- DXC Technolohy
Why the stock market has grown so much
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Profit forecasts in 2021 became one of the main drivers of growth in the US stock market, which began in mid-March after the “coronavirus” collapse, Kostin writes.
Of course, stimulus measures from the state and central bank gave him an impetus. But if investors did not believe that already in 2021 American companies would be able to increase profits and revenue, and instead would be mired in poor reporting for the current year, then such a strong market growth would be impossible.
All leading US stock indices restored a significant part of the losses of the last collapse. The Dow Jones Industrial index has grown by 37% since mid-March and is no more than 16% before reaching February highs. The S&P 500 index also rose from the bottom of March by 37%, to the February heights it remains to grow by 11%. The high-tech index NASDAQ Composite rebounded from the bottom by 39%, and only 3% separates it from the historical maximum.
Goldman Sachs revised S&P 500 forecast
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In early May, Goldman Sachs analysts predicted a decrease in the S&P 500 index to 2,400 points over the next three months. However, after a “powerful recovery” of the market, bank experts revised their expectations upward. According to their estimates, monetary and fiscal support limited the possible decrease in the S&P 500 index by no more than 10%.
The negative scenario of Goldman Sachs allows the collapse of the S&P 500 to 2750 points, that is, only 10% of current levels. Goldman Sachs experts consider the index most likely to rise to 3200 points. At the end of the year, analysts left the target of the S&P 500 index unchanged at 3,000 points.
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