Goldman thinks the market is underestimating the odds of a faster-than-expected coronavirus vaccine

Published Thu, Aug 6 20206:48 AM EDTUpdated Thu, Aug 6 20207:23 AM EDT

(This story is only for CNBC Pro subscribers ) Markets underappreciate the rising odds of a Covid-19 vaccine and are failing to price in the better chances of an FDA-approved inoculation by the end of November, Goldman Sachs told clients. Goldman cited revised projections from consulting firm Good Judgment, which in early June saw less than a 10% chance of a vaccine being "broadly available" by the end of March 2021, now it puts that chance at nearly 40%. Goldman said Wednesday it agrees with those findings, telling clients "there is a good chance that at least one vaccine will be FDA-approved by the end of November and broadly distributed by the middle of 2021." It also gave clients an options trade that would pay off with a faster-then-expected vaccine. "This kind of timeline could see a substantial boost to GDP relative to a 'no-vaccine' case, particularly for the US, which is likely to lead the vaccine race and is likely to experience worse outcomes than in Europe without a vaccine," Goldman's Kamakshya Trivedi, Zach Pandl and Dominic Wilson wrote. "The steep rise in vaccine probabilities is, in our view, one key reason that the equity market has managed to make new highs even without definitive improvement in US health outcomes," they added. Though high-growth Big Tech stocks have helped the Nasdaq Composite hit multiple record highs since its March 2020 low, Wall Street's most-recent gains have been more evenly distributed to names with greater reliance on the health of the U.S. economy. Investors have moved cash into cyclical sectors — financials, materials, industrials, energy — throughout the summer. Financials, for example, has been the second-worst performing S & P sector in 2020 as investors fled banks in the spring for fear of recession, plus widespread defaults and lower interest rates. But over the last month, financial have outpaced the broader stock market, up a hefty 6.7%. Even beat-down energy stocks, easily the worst laggards of the year, are up 3% in the last week. The analysts noted that the summertime strength from a wider portion of the market comes despite an uptick in Covid-19 cases across the U.S. — in other words, despite a development that might otherwise weigh on equities. That's because markets are beginning to, but have yet to fully, appreciate the rising odds of an approved vaccine before the end of the year, the Goldman team said. The analysts underscored their belief in a better vaccine outlook by saying the options markets look cheap. Using Good Judgment's forecasts "for our upside case implies that the current equity market level is consistent with a probability of around 40% for both our baseline and upside cases and 20% for the downside case — in other words, 60% on the 'no early vaccine' outcome," the Goldman team wrote. "On these estimates, options markets may be underpricing the fatness of both 'tails', especially the upside case. Out-of-the-money call options on the S & P 500 (and some other indices) still look attractively priced given our view of the vaccine timeline."

Scientist Xinhua Yan works in the lab at Moderna in Cambridge, MA on Feb. 28, 2020. Moderna has developed the first experimental coronavirus medicine, but an approved treatment is more than a year away.

David L. Ryan | Boston Globe | Getty Images

(This story is only for CNBC Pro subscribers)

Markets underappreciate the rising odds of a Covid-19 vaccine and are failing to price in the better chances of an FDA-approved inoculation by the end of November, Goldman Sachs told clients.

Goldman cited revised projections from consulting firm Good Judgment, which in early June saw less than a 10% chance of a vaccine being "broadly available" by the end of March 2021, now it puts that chance at nearly 40%.

Goldman said Wednesday it agrees with those findings, telling clients "there is a good chance that at least one vaccine will be FDA-approved by the end of November and broadly distributed by the middle of 2021."

It also gave clients an options trade that would pay off with a faster-then-expected vaccine.