The rebound in the stock market on Friday was a welcome relief to investors and advisors who had seen the Dow Jones industrial average and S&P 500 drop more than 5% in the two preceding days, but it’s not clear all clouds have lifted.
Aside from overvaluation, especially of some sectors like technology, some of the catalysts behind last week’s rout remain: the escalating trade war with China, excessive leverage in the corporate bond market and rising interest rates though the 10-year Treasury yield, which ended Friday at 3.16%, below the 7 1/2-year high of 3.25% posted Monday.
By week’s end, the S&P 500 and Dow were both down 4% for the week, three-quarters of S&P 500 stocks were priced 10% or more under their 52-week highs and the index closed just above its 200-day moving average, which it had crashed through during the two-day rout.
“It could go either way,” says Brad McMillan, chief investment officer offor Commonwealth Financial Network. But he says Friday’s rebound with “enough buyers to overwhelm a wave of selling and comfortable going into the weekend with risk assets” signifies the panic selling is over. “If we’re not done yet, we’re probably close.”
Goldman Sachs strategists, led by David Kostin, also foresee “limited further downside,” based on market fundamentals, according to their latest market note. Earnings growth, which averaged 25% during the first two quarters, is expected to climb 21% for the third quarter, return on equity excluding financials is at a record high of 20.7% and lower corporate tax rates all augur well for large cap stocks, according to Goldman.
In addition, Goldman economists give low odds — 37% — of a recession during the next three years, and its strategists expect a limited increase in interest rates. They’re forecasting the 10-year Treasury yield ends the year at 3.1%, slightly below the current level — and at ends 2019 at 3.4% since inflation, based on the core Consumer Price Index, is up just 2.2% this year.
But Goldman strategists also note that S&P 500 earnings per share could fall to $159 from an expected $170 if the U.S. imposes tariffs on most if not all of the $267 billion it has not already targeted but President Trump has threatened.