So much for the V-shaped recovery. With even Jerome Powell warning that the US economy won't fully recover until the end of 2021 (assuming no second infection wave; should that happen it's pretty much game over), Goldman has quietly gone from V to U, and in the penultimate paragraph of David Kostin's latest Weekly Kickstart report, the Goldman strategist writes that he is further cutting his forecast for corporate profitability this year (which perhaps is why futures are on a rampage on Sunday night; not really - it's just because retail investors have gone batshit insane and are buying every fractional share they see, even as hedge funds remain paralyzed in dread at what's coming).
Validating the scariest - for bulls - chart, namely the one showing that 2-year (not 1-year forward) valuations are now the highest on record...
... Kostin writes that while he maintains his 2020 S&P 500 EPS estimate of $110 (-33%), he is adjusting his quarterly path of earnings growth in Q3 and Q4 substantially lower: "we still expect that 2Q will represent the trough in EPS growth, driven in part by further reserve builds in Financials, but we lift our 2Q growth estimate from -123% to -70% yr/yr given the relative health of several major stocks accounting for 20% of EPS." However, at the same time, Goldman is lowering its EPS growth estimates for 3Q to -30% (from -21%) and no longer sees a full recovery in the fourth quarter, instead expecting Q4 EPS to be down -17%Y/Y (from +27%) "to reflect a more gradual recovery with quarterly EPS remaining below 2019 levels for the full year."
Looking beyond 2020, the Goldmanite writes that "investors remain focused on how quickly lost earnings can be recouped" and for his part, has a "base case" forecast for S&P 500 EPS to reach $170 in 2021, just barely above the level from 2019 ($165), and which as a reminder was virtually unchanged with 2018 due to all the trade war tension and turmoil in 2019 which meant the only source of upside was multiple expansion. However, further bifurcating a market that is largely a reflection of just 5 megatech stocks (FAAMGs), the "recovery" would continue to be uneven, "with EPS in cyclical sectors unlikely to recover to 2019 levels by 2021" if ever.
An even worse, case, however, is Goldman's downside scenario where S&P 500 EPS falls to $70 this year and reach just $115 in 2021...
... which would mean that the S&P is now trading at a 25x multiple not on 2020 earnings by 2021!
"We envision this downside scenario occurring either because the path to economic normalization is slower than we now expect or because of lingering economic impact even after the spread has been controlled. "
The silver lining is that consensus bottom-up EPS estimates remain more closely aligned to Goldman's optimistic base case than its downside case; 2021 consensus estimates have been cut by 16% YTD to $165. Alas, consensus is always wrong, which means that within a few months, the talking heads will be on TV desperately seeking to justify why 3000 on the S&P make sense based on a 150 EPS in 2021.
And since fundamentals no longer matter, but fundamental analysts still have to somehow justify absolutely idiotic valuations, Goldman has done what until recently would have been deemed idiotic by most, and now admits that EPS are unlikely to return to previous peaks until 2023, which means that the
goalseeked "proper" forward PE multiple one should use is no longer based on 2020 EPS, or 2021, or even 2022 for that matter... but 2023!
In other words, we have now teleported into some batshit insane world, where one has to look at earnings 3.5 years into the future (which, needless to say, one has no hope in hell of accurately predicting... which is precisely why Goldman is using them) to "justify" current market valuations.