Goldman Sachs: Market mayhem has gotten out of hand. Stocks will rebound

Nervous investors are bracing for a dramatic slowdown in America's roaring economy.But Goldman Sachs ...

Posted: Oct 30, 2018 3:29 AM
Updated: Oct 30, 2018 3:29 AM

Nervous investors are bracing for a dramatic slowdown in America's roaring economy.

But Goldman Sachs thinks the October market scare -- the S&P 500 plunged as much as 9% from its record high -- has gotten out of hand.

Banking, finance and investments

Business, economy and trade

Companies

Company activities and management

Company earnings

Economic indicators

Economy and economic indicators

Financial markets and investing

Financial performance and reports

Financial results

Goldman Sachs

Securities trading

Stock indexes

Stock markets

Yes, economic and profit growth are likely to lose steam over the next year. But the US economy still looks healthy. Economists don't foresee an imminent recession.

"The sell-off appears to have overshot the fundamentals," Goldman Sachs chief US equity strategist David Kostin wrote to clients after Friday's closing bell.

Investors appeared to agree with that thinking, with the Dow soaring as much as 352 points on Monday morning. But the rally eventually crumbled and the index was down about 300 points late in the day.

The recent market mayhem was swift. Despite Monday's rebound, the Nasdaq is down a stunning 13% in October. If that loss holds, it would be the Nasdaq's worst since November 2008. Highflying stocks are down much more. Amazon (AMZN) and Netflix (NFLX) have each plunged about 24% in October.

The foundation for the October market scare was laid in September. Investors became too euphoric about growth, driving valuations up to unsustainable levels.

The sudden spike in Treasury yields forced the markets to quickly adjust. Worries about trade wars and disappointing earnings added further pressure to stocks. The Fear & Greed Index, a CNN Business gauge of market sentiment, flipped from "greed" in September to "extreme fear."

Too negative?

Even though some economic and earnings reports have fanned the fears of a sharp slowdown, Goldman Sachs expects "positive" economic data to continue. The firm predicts the S&P 500 will recover to 2,850 by year end, representing a significant rebound of 7% from Friday's close.

"We believe the market has moved past fair value," Kostin wrote.

In other words, the pendulum swung too far into pessimism.

Rather than a sharp economic slowdown, Goldman Sachs economists are calling for "gradually decelerating" US GDP growth from 3.5% in the third quarter to 1.6% at the end of 2019.

Investors have also grown worried that the Federal Reserve may be raising interest rates faster than the economy can handle. Higher borrowing costs are already slowing home and auto sales. The SPDR S&P Homebuilders ETF (XHB) plunged nearly 30% since late January. Ford (F) has lost about a third of its value over that span.

Ed Yardeni, president of Yardeni Research, said the Fed may need to pause rate hikes and monitor how the economy responds to higher borrowing costs.

"The plunge in stock prices," Yardeni wrote to clients on Monday, "suggests that the economy may not be as strong as the Fed perceives."

More room to fall?

Some analysts believe the market may have to tumble further in response to a looming slowdown in earnings growth.

S&P 500 earnings per share growth is projected to peak in the fourth quarter at 23% and decelerate to around 9% at the end of 2019, according to CFRA. The loss of momentum is being in driven in part by the waning impact from the tax cuts.

CFRA found that most peaks in earnings growth since 1951 have been accompanied by bear markets or by corrections. The S&P 500 has not yet closed 10% lower from its peak.

"We think this decline will become a mild-to-medium correction," Sam Stovall, chief investment strategist at CFRA, wrote to clients on Monday. "We don't anticipate a new bear market."

The recent market turmoil marks the second decline of 5% or more for the S&P 500 so far this year. In the 26 years since World War II that twin 5% declines have occurred, the second decline was typically deeper than the first, Stovall found.

Buybacks to the rescue

Even if the market slump deepens, Wall Street is welcoming a powerful buyer coming off the sidelines: Corporate America.

The market mayhem coincided with a "blackout" in share buybacks. Companies typically avoid repurchasing shares during the two weeks prior to reporting earnings. That's a big deal because Corporate America has been the biggest buyer of shares since 2009.

But Goldman Sachs estimates that 48% of S&P 500 companies are now out of their blackout windows. UBS predicts that buybacks and dividends will total $170 billion over the next month, tripling the level of the past four weeks.

That could be just what the bull market needs to get back on track.

West Lafayette
Partly Cloudy
48° wxIcon
Hi: 60° Lo: 44°
Feels Like: 45°
Kokomo
Partly Cloudy
45° wxIcon
Hi: 57° Lo: 44°
Feels Like: 42°
Rensselaer
Clear
43° wxIcon
Hi: 59° Lo: 44°
Feels Like: 39°
Fowler
Partly Cloudy
48° wxIcon
Hi: 58° Lo: 43°
Feels Like: 45°
Williamsport
Partly Cloudy
49° wxIcon
Hi: 59° Lo: 43°
Feels Like: 45°
Crawfordsville
Clear
43° wxIcon
Hi: 58° Lo: 43°
Feels Like: 37°
Frankfort
Clear
43° wxIcon
Hi: 58° Lo: 44°
Feels Like: 37°
Delphi
Clear
42° wxIcon
Hi: 60° Lo: 45°
Feels Like: 37°
Monticello
Clear
42° wxIcon
Hi: 60° Lo: 46°
Feels Like: 37°
Logansport
Clear
46° wxIcon
Hi: 58° Lo: 43°
Feels Like: 44°
Windy & warm weather will give way to cooler conditions & rainfall...
WLFI Temps
WLFI Planner

Indiana Coronavirus Cases

Data is updated nightly.

Cases: 1107189

Reported Deaths: 17621
CountyCasesDeaths
Marion1446032234
Lake718651243
Allen66280881
Hamilton50567487
St. Joseph49217645
Elkhart39818546
Vanderburgh34458496
Tippecanoe30484274
Johnson27431465
Hendricks26064382
Porter25355386
Madison20880450
Clark20071278
Vigo18905309
LaPorte17019261
Howard16577313
Delaware16575299
Monroe16463220
Kosciusko14118166
Hancock12984185
Bartholomew12813190
Warrick12113190
Wayne11987268
Floyd11939226
Grant11845241
Morgan10324191
Boone9770121
Noble9181122
Henry9093167
Marshall9002147
Dearborn8900100
Dubois8778139
Shelby8178129
Cass8099127
Lawrence7989184
DeKalb7693108
Jackson758393
Huntington7548111
Gibson7045118
Montgomery6986123
Harrison6905100
Knox6884115
Steuben661988
Miami6530111
Whitley651460
Putnam638384
Clinton622177
Wabash6137111
Jasper607392
Jefferson5760104
Ripley553093
Adams537981
Daviess5042117
Scott485780
Wells4787103
White472869
Greene4661100
Clay460562
Decatur4576110
Jennings445767
Fayette442894
LaGrange423190
Posey405444
Randolph3872107
Washington387056
Fountain370464
Fulton361673
Spencer359247
Starke351574
Owen349677
Sullivan346654
Orange326572
Jay323950
Rush304332
Carroll291839
Franklin289544
Perry287153
Vermillion282058
Tipton249465
Parke248530
Pike245544
Blackford219744
Pulaski207559
Newton180652
Brown174250
Crawford168329
Benton165517
Martin152119
Switzerland146812
Warren133916
Union120516
Ohio92113
Unassigned0588

COVID-19 Important links and resources

As the spread of COVID-19, or as it's more commonly known as the coronavirus continues, this page will serve as your one-stop for the resources you need to stay informed and to keep you and your family safe. CLICK HERE

Closings related to the prevention of the COVID-19 can be found on our Closings page.

Community Events