Goldman Sachs Sees Potential S&P 500 Bear Market on Europe

By Inyoung Hwang - Jun 5, 2012 12:37 AM GMT+0700

An intensifying financial crisis in Spain or elsewhere in Europe has the potential to drive American stocks into a bear market, Goldman Sachs Group Inc. (GS)’s chief U.S. equity strategist said.

While David Kostin’s mid-year forecast for the Standard & Poor’s 500 Index calls for a 3.7 percent gain from last week’s close to 1,325, he said the measure may fall to 1,125 should the situation in Europe worsen. That would give the S&P 500 a more- than 20 percent loss since its 2012 closing peak of 1,419.04.

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Traders work on the floor of the New York Stock Exchange after the opening bell on June 4, 2012 in New York City. Markets are struggling to recover after major losses last week. Photographer: Mario Tama/Getty Images

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The June 1 report from Goldman Sachs said the most likely scenario is Greek elections result in the nation remaining in the euro zone. Concern it will leave has helped drag the S&P 500 down 10 percent since April 2, including the biggest monthly decline since September. “Financial contagion or crisis in Spain” could prompt a bear market drop of 20 percent, according to the report.

Goldman Sachs also predicted a Greek exit from the euro zone area could push the Stoxx Europe 600 (SXXP) Index down a further 3.8 percent to 225 and a policy response considered not credible or bank disruptions in other countries may send the European gauge to its 2009 low of 158.

Peter Oppenheimer, the London-based chief global equity strategist at Goldman Sachs, reduced his three-month forecast for the Stoxx Europe 600 by 5.8 percent to 245 last week. The European measure slid 0.5 percent to 233.87 today.

Three Events

Kostin said investors face three upcoming macro events that may add uncertainty: the second round of Greek elections on June 17, the Federal Open Market Committee’s June meeting and the U.S. Supreme Court’s ruling on health-care reform.

The S&P 500 has found “valuation support” around 11 times estimated earnings in previous crises, according to Kostin. The measure has not remained lower than a multiple of 11 for longer than a month since the late 1980s, including during October 2008 and September 2011, he said. The U.S. index currently trades at 12.1 times analysts’ projected profits in the next year, while the Stoxx Europe has a multiple of 9.7, according to data compiled by Bloomberg.

Barclays Plc’s Barry Knapp predicts the S&P 500 may fall to between 1,100 and 1,200 based on historic equity risk premium levels, which looks at forward earnings yield minus the real 10- year Treasury yield.

‘Quite Significant’

The benchmark gauge erased as much as 16 percent and 19 percent in 2010 and 2011 respectively as economic data weakened and investor concern about a double-dip recession grew. A Labor Department report last week showed payrolls climbed by 69,000 last month, less than the most-pessimistic forecast in a Bloomberg News survey, after a revised 77,000 gain in April. Two months of payroll gains below 100,000 “significantly” boosts the likelihood of a third consecutive double-dip scare, according to Knapp’s report.

“There is little room for optimism in this morning’s report,” Knapp, the New York-based head of equity strategy, wrote in the June 1 note after the release of the payrolls data. “Although the equity market has cheapened considerably, it is not close to last year’s levels from a risk premium perspective and if the uptrend in the equity risk premium continues, the market’s fall may be quite significant.”

To contact the reporter on this story: Inyoung Hwang in New York at ihwang7@bloomberg.net