As the global economy begins to recover from the pandemic-induced recession, stock markets have been on a steady rise. However, one strategist is warning that despite the absence of an “earnings apocalypse,” stocks still need to drop by 15%.
The strategist in question is David Kostin, the chief US equity strategist at Goldman Sachs. In a recent note to clients, Kostin explained that while the earnings season has been strong so far, the current stock market valuations are still unsustainable.
Kostin notes that the current S&P 500 valuation is at 22.1 times forward earnings, which is well above the 10-year average of 16.2. This suggests that investors are paying a premium for stocks that may not be supported by their underlying earnings potential.
While the earnings season has been strong, Kostin warns that this may not be enough to sustain the current market rally. He notes that the earnings growth rate for the S&P 500 is expected to peak in the second quarter of 2021 and then start to slow down. This, combined with the high valuations, could lead to a 15% market correction.
Kostin’s warning is not without precedent. In fact, many analysts have been warning of a potential market correction for some time now. The pandemic-induced recession caused unprecedented volatility in the stock market, with the S&P 500 falling by more than 30% in March 2020.
Since then, the market has rebounded strongly, with the S&P 500 recovering all of its losses by August 2020. However, the market’s current valuation has raised concerns among many investors, who fear that the current rally may not be sustainable.
Despite these concerns, some investors remain optimistic about the market’s future. They argue that the unprecedented monetary and fiscal stimulus provided by governments and central banks around the world will continue to support the market’s recovery.
In conclusion, while the current earnings season has been strong, investors should not become complacent. The high valuations and potential slowdown in earnings growth could lead to a significant market correction. It is essential for investors to remain vigilant and keep a close eye on market trends to protect their portfolios from potential losses.
