A Recession Could Push S&P 500 to 3360 - Goldman Sachs

May 19, 2022 6:33 AM EDT
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Goldman Sachs' chief U.S. equity strategist, David Kostin, has reflected on the growing possibility of the US economy entering a recession.

Goldman’s economists are forecasting a 35% probability that the US will enter recession during the next two years.

“Rotations within the US equity market indicate that investors are pricing elevated odds of a downturn compared with the strength of recent economic data. Additionally, the dividend futures market implies that S&P 500 dividends will decline by nearly 5% in 2023. During the last 60 years, S&P 500 dividends have not declined outside of a recession,” Kostin said in a client note.

The bank’s research shows that the S&P 500 index has contracted from peak to trough by a median of 24% in 12 recessions since World War II.

“A decline of this magnitude from the S&P 500 peak of nearly 4800 in January 2022 would bring the S&P 500 to approximately 3650 (11% below current levels). An average decline of 30% would reduce the S&P 500 to 3360 (-18% from today),” Kostin added.

Moreover, the S&P 500 earnings fell by a median of 13% from peak to trough before recovering by a median of 17% in the following four quarters.

“The S&P 500 forward P/E multiple has contracted by a median of 21% between its pre-recession peak and its eventual trough. During the typical recession since 1980, the index P/E multiple peaked 8 months in advance of the onset of a recession and declined by 15% between its pre-recession peak and the beginning of the recession,” Kostin added.

Finally, defensive sectors and quality stocks outperformed in the 12 months prior to the recession.

By Senad Karaahmetovic

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