Expect a 30% Market Drop Overall, Goldman Warns

The stock market is edging into bear territory. How deep will the rout be? A lot worse than now, says Goldman Sach’s top US equity strategist—for a peak-to-trough plummet of 30.2%, in fact.

“After 11 years, 13% annualized earnings growth, and 16% annualized trough-to-peak appreciation, we believe the S&P 500 bull market will soon end,” Goldman’s David Kostin wrote in a research note. “Investors have cut their equity positions in recent weeks, but not to levels reached at the trough of other major corrections this cycle.”

On Wednesday, the S&P 500 ended up just shy of the 20% slide needed to qualify for bear status. The Dow Jones Industrial Average cascaded below that mark and now is in a bear market.

Kostin said he expected the market’s free fall to keep going until it dipped another 15% from Tuesday’s close. If so, that would translate to a 30.2% decline from the S&P 500’s peak reached on Feb. 19. Such a loss would be comparable to the index’s 2008 decrease, as the financial crisis raged.

Volatility, of course, is way up lately—the market even popped up Tuesday, only to resume its dive. Up until the present plunge, the market was so tame it never moved beyond 1% per day.

The bad news doesn’t end with the market’s skid. Kostin added that he expected a “collapse” in second- and third-quarter earnings this year. Rock-bottom interest rates would be insufficient to prevent such a wipe-out, he cautioned.

“Supply chains have been disrupted and final demand has declined for many industries,” he declared. “Travel is contracting sharply as both individuals and businesses restrict movement. Airlines, hotels, cruises, and casinos report plunging demand, lower occupancy, and cancellations. Employees are being furloughed.”

At the same time, however, Kostin said he looks for a rebound in 2020’s second half that will push the S&P 500 back to 3,200 by year-end. That would leave the index just 5.2% below its February apex.

Stocks worldwide have been slammed since late February as the coronavirus spread beyond China, where it started, and reached Europe, Japan, and the United States. The worry is that the economic impact will be so harsh that it will propel some nations’ economies into recession.

Energy and financial companies, already the biggest market losers, will remain the hardest hit, Kostin contended. “Domestic business activity outside of those sectors,” he added, “is also likely to be weaker than we originally forecast, as underscored by reduced or withdrawn guidance.”

Kostin suggested that clients favor investing in companies with stable profits and solid balance sheets.