There are 6 reasons why Goldman Sachs sees the market dropping nearly 20% in 3 months

Published Mon, May 11 202011:33 AM EDT

(This story is for CNBC Pro subscribers only.) The stock market has rebounded swiftly from its coronavirus low in March as investors bet on a reopening of the economy. However, Goldman Sachs warned sentiment will turn sour again soon as reality sets in. A number of red flags in the market caused the bank to stick to its bearish view in the near-term, seeing the S & P 500 dropping nearly 20% in three months. Goldman broke down six reasons for a likely pullback. "A single catalyst may not spark a pullback, but a number of concerns and risks exist that we believe, and our client discussions confirm, investors are downplaying," David Kostin, bank's chief U.S. equity strategist, said in a note. The strategist predicted that the S & P 500 will fall to 2,400 over the next three months before it rebounds to 3,000 by year end. The equity benchmark fell 0.6% to about 2,911 on Monday. No. 1: No buybacks For one, corporate buybacks, which have been a major source of demand for equities, is threatened amid the global pandemic, Kostin said. "Equity investors should be concerned because buybacks have been the only source of net demand for shares in the past decade," Kostin said. Goldman specifically pointed out the problem in the financials sector, where most companies have suspended buybacks. No. 2: Dividends declining In the same vein, dividends are also at risk due to the unprecedented uncertainties, he added. "In an effort to preserve liquidity, more than 40 stocks have suspended or reduced their dividends YTD." The bank sees dividends fall by 23% this year. No. 3: Coronavirus risks In addition, the bank pointed to an increase in new coronavirus cases outside of New York state, which suggests infection may accelerate as more states begin to relax shelter-in-place restrictions, Kostin said. Over the weekend, South Korea warned of a new cluster of cases involving night clubs and the number of new coronavirus cases worldwide reached 4 million . Singapore and Japan also confirmed new cases . Meanwhile, New York saw its coronavirus hospitalizations fall to March levels. No. 4: Reopening risks The other reason for a market correction is the reopening process could take a longer time than expected, Kostin said. The strategist highlighted a management comment from manufacturing company IDEX that said "this is going to be fits and starts....we have to face the reality that's in front of us." No. 5 US political risks: On the political front, risks have also been rising with potential higher corporate taxes, Goldman warned. If the 2017 corporate tax reform is reversed following the result of the presidential election in November, the stock market could take a big hit, Kostin said, adding the earnings per share for the S & P 500 could fall by $19 in this scenario. No. 6: China trade deal at risk?: Meanwhile, tensions between the U.S. and China escalated again recently over the origin of the coronavirus pandemic. Top trade negotiators for the two countries agreed to work toward implementing the "phase one" trade deal the two countries signed in January. "Investors may need to contend with another twist in US-China trade/strategic development, which was at the forefront of investor concerns for much of 2019," Kostin said. "The nature of the tension seems multi-faceted going beyond conflicts in merchandising and service trades, with the US administration's rhetoric and actions towards China turning more hawkish in the past month across various issues and strategic domains."

A person walks down Wall Street on April 02, 2020 in New York City.

Spencer Platt | Getty Images

(This story is for CNBC Pro subscribers only.)

The stock market has rebounded swiftly from its coronavirus low in March as investors bet on a reopening of the economy. However, Goldman Sachs warned sentiment will turn sour again soon as reality sets in.

A number of red flags in the market caused the bank to stick to its bearish view in the near-term, seeing the S&P 500 dropping nearly 20% in three months. Goldman broke down six reasons for a likely pullback.