Goldman Sachs Warns of Incoming Stock Pullback

Speaking at the Goldman Sachs Strategy Conference, Goldman Sachs Chief Economist Jan Hatzius warned of an incoming stock pullback. He said that US stock and bond markets could “take more of a breather” in the immediate future after establishing record highs earlier this month. During the conference, Hatzius presented his outlook and shared why market valuations are due to stop moving “relentlessly higher.”  

RELATED: Will Wall Street Continue to Rise in 2021?

2021 Started with a Bang 

Wall Street started 2021 with guns blazing, even as the coronavirus pandemic rages on. Last Friday, major indices closed at record highs, with both Dow Jones Industrial and S&P 500 adding 70% while Nasdaq gained 80%. 

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Meanwhile, 10-year U.S. Treasury yields went over 1%, with the benchmark hitting 1.18% by Tuesday.  Treasury yields serve as benchmarks for global bonds, and a rise in yields often signals a rise in interest rates on debts. Companies will now have to pay more for the same debt, which could strain bottom lines and affect share prices. 

Democrat Blue Wave 

The Treasury yield rates went higher over the confirmation of Democrat Joe Biden to the US Presidency. In addition, Democrats captured the Senate majority during the Georgia runoff elections. This means a blue wave will envelop Washington DC, where the White House and both chambers of Congress are Democrats. 

Hatzius said the pause could result from the Federal Reserve tightening its stimulus programs, plus the backup in long-term interest rates. This can lead to less money heading out into the economy, which can dampen the stock market.  

Optimistic About Long Term Prospects 

Despite the stock pullback in the short term, Hatzius remains optimistic about Wall Street in the long term. He said he thinks it will continue moving higher, noting that “We still think it’s a friendly environment for risk assets, for equities and credit.” Hatzius added that “We’re early in the business cycle, there’s still plenty of slack in the economy in the U.S. and even more so in other economies.”

His optimism comes from inflation staying below the target. At the same time, the Feds are still working to jumpstart economic recovery. Combined, these factors are “generally pretty positive for markets.”

Adjusted Economic Growth from 5.6% to 6.4%

In fact, Goldman Sachs put its money on the long term forecast. It upgraded its US economic growth forecast from 5.6% to 6.4% last week. The financial giant thinks that the Democrat Blue Wave can lead to more economic stimulus programs passing Congress and getting signed by the President. 

Also, Hatzius said that early data suggests that economics are improving due to some effects of the pandemic. Unproductive firms have closed, and surviving firms learned to tighten belts and cut costs. He said that “There actually seems to be an improvement relative to the pre-pandemic period, it seems like the pandemic may be catalyzed some of the productivity improvements so that’s also pretty positive.” 

Goldman Sachs Sets Expectations for 2021

Goldman Sachs also presented key expectations for 2021, based on a Blue Wave government and continued economic improvement versus the coronavirus pandemic.  

Goldman Sachs expects another round of fiscal stimulus with a $750 billion price tag. This includes $300 billion in stimulus checks, $250 billion in state and local relief, and $150 billion in extended unemployment benefits. With the infusion of additional stimulus, the GDP should rise to 6.4%, up from previous estimates of 5.9%. This is almost double last year’s 2.6% contraction and more than the estimated 3.6% contraction last year. In turn, the rising GDP can drop the unemployment rate from 6.7% to 4.8%. With faster economic growth and more spending, inflation will go up as well as interest rates. The average price of goods should rise by 1.8% higher in 2021. 

S&P Should Rise 4,3000 Points in 2021 

In addition, Goldman Sachs expects the S&P 500 growing earnings by 31%. However, an expected corporate tax hike in 2022 can bring down the yearly expected earnings growth down to 10%. The financial giant expects a 4,3000 point rise for the S&P by the end of 2021, giving it a 13% upside after rising 16% in 2020.

Watch the CNBC interview with David Kostin, Goldman Sachs chief U.S. equity strategist, as he discusses the market outlook for 2021:

Do you agree with Goldman Sachs’ prediction of a short term stock pullback? Or, do you see more of the same for the stock markets this 2021? Let us know what you think about predictions for 2021. Share your comments below.