- Stocks finally suffered a 5% pullback for the first time in nearly a year, and could fall further.
- Morgan Stanley is pessimistic about stocks’ trajectory, while Goldman Sachs is more bullish.
- Goldman Sachs named 40 stocks with high upside ahead of the Q3 earnings season.
- See more stories on Insider’s business page.
A long-awaited 5% pullback finally hit the S&P 500 in late September for the first time since before the 2020 presidential election.
The index saw its impressive seven-month winning streak snapped as it retreated 4.8% in September, and October is off to a choppy start. Fears of slowing growth, rising inflation, and a more hawkish
are to blame for the recent weakness.
But history says that the S&P 500’s gravity-defying gains of 2021 should continue through Q3 earnings season, wrote Ryan Detrick, LPL Financial’s chief market strategist, in a recent note. In the past, winning streaks of seven months or more led to the index rising in the following six months a staggering 13 of 14 times, Detrick wrote. That statistic isn’t the only one that makes him bullish.
“The past seven times the S&P 500 was up 15% year-to-date heading into the home stretch of the year, the fourth quarter was higher every single time, up a very impressive 5.8%,” Detrick wrote. “In other words, should there be any October scares, investors may want to use the weakness as an opportunity to add to core positions.”
The fourth quarter of the year is typically strongest for stocks, Detrick added, as the S&P 500 climbs 3.8% on average. By contrast, the third quarter of the year is usually the weakest.
Goldman Sachs appears to be on board with the bullish sentiment. The firm expects the S&P 500 to advance to 4,700 by year’s end, which would translate to a stellar 25% performance in 2021. The index must first race 9% higher in the fourth quarter, a run that would place it in the 83rd percentile of fourth-quarter gains since 1928, wrote David Kostin, the firm’s chief US equity strategist, in an October 4 note.
Conversely, Morgan Stanley is cautious and believes the S&P 500 will end the year at 4,225. Chief US Equity Strategist Mike Wilson warned in an October 3 note that investors are currently overlooking slowing economic and earnings growth, the apparent waning of easy monetary policy, and supply-chain issues.
“The question for many investors now is whether the price action has already discounted these fundamental outcomes,” Wilson wrote. “The short answer, in our view, is no.”
Buying the dip could prove to be a mistake, Wilson wrote, even if a massive crash is unlikely.
“The most powerful offset to a material correction in the S&P 500 this year has been the extremely resilient buy-the-dip mentality among retail investors, a strategy that is now being challenged,” Wilson wrote.
Though Morgan Stanley believes the broader market will struggle to snap out of its funk, Goldman Sachs says there are still plenty of opportunities in stocks.
Goldman Sachs named 40 companies that have the most upside to the price targets that their analysts set ahead of the Q3 earnings season. Below are the high-upside stocks, along with each company’s ticker, market capitalization, price-to-earnings ratio, and potential upside to Goldman Sachs’ price target as of September 30.