Ask Goldman:
Back to the future. Six months ago, on February 19th, the S&P 500 Index reached an all-time high of 3386. The world was in a far distant place compared with today. US GDP was expected to grow by an average of 2.1% in 2020. Both the fed funds rate and the 10-year US Treasury yield equaled 1.6%. Consensus 2020 and 2021 EPS estimates for the S&P 500 were $176 and $196, implying 1-year and 2-year forward P/E multiples of 17.3x and 15.8x, respectively. Our calculation of the market-implied equity risk premium (“ERP”) equaled 5.4%.
Then, the coronavirus hit. The world stopped. Economies froze. The S&P 500 plunged by 34% in 23 trading days. More than 20 million people globally and 5 million individuals in the US contracted COVID-19. Tragically, more than 750,000 people worldwide have died of the virus, including 167,000 in the US. The Fed cut the funds rate to near-zero (0-25 bp). Congress opened the fiscal spigot and implemented a variety of income-replacement policies designed to help individuals and businesses bridge to the other side of the pandemic.
