Goldman raises 2020 S&P 500 forecast, sees 7% gain to new record

Published Mon, Aug 17 20208:35 AM EDTUpdated Mon, Aug 17 202011:10 AM EDT

(This story is for CNBC Pro subscribers only.) Goldman Sachs hiked its year-end target on the S & P 500 to catch up with the historic rally that pushed the market within a hair's breadth of its record. However, the bank warned that the U.S. election poses a significant risk to this call. David Kostin, Goldman's head of U.S. equity strategy, raised his 2020 forecast for the S & P 500 to 3,600 from 3,000 after the broad equity benchmark climbed more than 50% from its March bottom. The new forecast represents a 7% gain from the S & P 500's Friday's close of 3372.85. The gauge briefly topped its February closing record last week and is only 0.6% below its all-time high. "The S & P 500 level has returned to its pre-pandemic high, but the building blocks supporting the price have shifted dramatically," Kostin said in a note. "Share prices reflect not just the expected future stream of earnings but also the rate at which the profits are discounted to present value." The strategist said the hike in his target is driven by valuation. The S & P 500 was trading 17 times forward earnings estimate in February, and now the ratio is about 20 times. Goldman's new year-end target implies a multiple of 21 times its 2021 earnings estimate of $170 per share. The bank believes the ultra-low bond yields this year have made equities more attractive for yield-hunting investors. The S & P 500 currently offers a 1.67% dividend yield versus the 10-year Treasury yield at just 0.6%. "A plunging risk-free rate partially explains why equities have performed so well despite downward revisions to expected earnings," Kostin said. Election risk Goldman noted that the presidential election remains a major uncertainty to the market as the pandemic causes unique difficulties in the voting process. "The US election is just 81 days away and represents a significant risk to our year-end forecast," Kostin said. "The coronavirus introduces a major complication in the timely tabulation of voting results." The bank gave an example of the New York 12th Congressional District Democratic primary, where it took six weeks to count all the absentee ballots and determine a winner. "Election uncertainty suggests near-term risk to our target is tilted to the downside. Of course, the largest risk to our forecast is the timing of a vaccine and path of recovery from the pandemic," Kostin said. Investors are mostly focused on former Vice President Joe Biden's tax policies and to what extent the Democrat could reverse Trump's 2017 tax cuts if he's elected. Goldman previously estimated that Biden's plan could decrease its 2021 earnings estimate to $150 per share if fully enacted. "However, the potential for changes in government policies outside of tax policy, such as fiscal spending, trade policy, and regulation, suggest a combination of upside and downside risks to earnings depending on the outcome of November's elections," Kostin said.

The Wall Street Bull (The Charging Bull) is seen during Covid-19 pandemic in New York, on May 26, 2020.

Tayfun Coskun | Anadolu Agency via Getty Images

(This story is for CNBC Pro subscribers only.)

Goldman Sachs hiked its year-end target on the S&P 500 to catch up with the historic rally that pushed the market within a hair's breadth of its record. However, the bank warned that the U.S. election poses a significant risk to this call.