A rise in bond yields could send the S&P 500 plummeting 17% from its current level, according to a Goldman Sachs analysis that looks at different factors and episodes that could cause the benchmark index to rise or fall more than as expected in your base scenario.
Thus, Goldman analysts, led by chief US equity strategist David Kostin, point out that a sharp rise in the 10-year US Treasury yield to 2.5% at the end of the year would weigh on equity prices. equities by making company dividends appear less attractive.
According to Goldman, this increase in yields would imply a price target for the S&P 500 of just 3,550 points , 17% below Monday’s closing price of 4,290.61 points.
However, the bank’s experts believe that it is highly unlikely that bond yields will show such a sharp increase. A rebound of 100 basis points would require a sustained rise in inflation much higher than anticipated.
In fact, Goldman estimates that the 10-year US Treasury yield will rise to 1.9% by the end of the year and that the S&P 500 will hit 4,300 points . Although Kostin and his team are cured in health by recognizing that “this future is not guaranteed.”
So far this year, the S&P 500 has accumulated a yield of more than 14% and this week it was hitting all-time highs again. This indicator has already exceeded the average end-of-year objective of the main investment desks, according to Bloomberg data, something that in turn has begun to generate some nervousness.
In the shadow of inflation and Biden’s tax plans
Stronger-than-expected inflation is another risk facing the US stock market, according to Goldman. “High inflation would probably lead to further tightening of the Fed than we now expect, raising rates and lowering equity valuations,” Kostin and his team justify.
According to them, higher-than-expected inflation would boost sales, but would weigh on companies’ profit margins .
The entity’s calculations estimate that for each percentage point of core CPI inflation above its forecasts (2.2% this year and 2.3% in 2022), S&P 500 sales growth would increase by approximately one point. percentage point but net profit margins would be reduced by about 10 basis points.
Of course, if the changes in inflation are moderate, this would not have a great impact on the earnings per share of the S&P 500.
On the other hand, from Goldman they consider that the shares would rise more than expected if President Joe Biden does not meet his objectives of raising corporate tax and capital gains. If these goals do not materialize, a “no tax reform” scenario could propel the S&P 500 to 4,500 points .
That said, the bank expects corporate tax to be raised from the current 21% to 25%, instead of the 28% proposed by Biden. He also believes that about half of the proposed foreign income tax increase will become law and that capital gains tax for the highest incomes will rise to 28%. Based on these assumptions, Goldman expects the S&P 500 to generate an earnings per share of $ 202 in 2022 (5% growth from 2021).