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Wall Street's top stock market experts strike bullish tone

Analysts from Wall Street’s top firms are getting more bullish on U.S. equities.

Swift and sweeping fiscal and monetary policy responses from U.S. officials will ultimately support stock prices from here, blunting some of the damage as the coronavirus pandemic and social distancing measures ravage the economy and grind business activity to a temporary halt, analysts at Goldman Sachs (GS), Morgan Stanley (MS), BlackRock (BLK), and JPMorgan (JPM) said in new notes Monday.

In other words, the bottom may already have been put in for stocks.

“The numerous and increasingly powerful policy actions have spurred equity investors to adopt a risk-on view,” said Goldman Sachs analyst David Kostin. “If the U.S. does not experience a second surge in infections after the economy reopens, the ‘do whatever it takes’ stance of policymakers means the equity market is unlikely to make new lows.”

Late last week, the Fed announced a new plan to inject some $2.3 trillion in funding for households and local governments, going above and beyond measures unleashed even during the 2008-2009 financial crisis and adding further support after cutting interest rates to a zero lower bound and turbo-charging its asset purchases last month. Subsequent remarks from Federal Open Market Committee Officials reaffirmed the central bank was still willing to do more to support the economy as the pandemic continues.

Those monetary policy actions were on top of the programs Congress authorized just weeks prior in its own more than $2 trillion economic relief package.

In total, the U.S. fiscal package “is equivalent to about 10% of the U.S. gross domestic product (GDP), the largest among key DMs [developed markets], and we believe there may be more to come,” BlackRock analysts led including Mike Pyle said Monday. “Overall, we see more policy room in the U.S. than in other DMs in coming months to help shore up the economy, but recognize that successful and timely execution of fiscal measures is a key risk everywhere, including in the U.S.”

The outsized policy response, combined with mounting evidence that social distancing measures are in fact “flattening the curve” for new virus infections, has helped entice investors back to risk assets, Kostin said. With these factors in mind, the S&P 500 is “no longer likely” to plunge to a previously seen “near-term downside risk of 2,000,” he added.

Goldman Sachs maintained a 3,000 year-end price target for the S&P 500, implying a 7.5% rise from Thursday’s close.

JPMorgan analyst Marko Kolanovic went a step further, predicting the S&P 500 would reach a new all-time high earlier next year given the recent boost from policymakers.

“Unhindered by moral hazard, the response of fiscal and monetary authorities is and will continue to be unprecedented, with the goal of essentially making everyone 'whole,’” Kolanovic said. “We believe the significance of this development is underestimated by markets, and this reinforces our view of a full asset price recovery, and equity markets reaching all-time highs next year, likely by H1.”

The Charging Bull statue, also known as the Wall St. Bull, is seen in the financial district of New York City, U.S., August 18, 2018. Picture taken August 18, 2018. REUTERS/Brendan McDermid

In a similar vein, Morgan Stanley analyst Mike Wilson on Monday raised his bear, base and bull – or most pessimistic, most likely and most optimistic – scenarios for the S&P 500 to a respective 2,500, 3,000 and 3,250. Previously, his targets were for 2,400, 2,700 and 3,000 in his bear, base and bull cases.

“Our base case is that the market already had its successful re-test the week of March 30, meaning that week’s lows of 2,450 should not be challenged again, especially with the extraordinary action by the Fed since then and flattening of the curve on COVID-19.”

Wilson also upgraded U.S. small cap equities after being underweight the group since July 2018.

“With the stimulus directed right at corporate credit and small/medium businesses in particular, these companies are potentially the biggest beneficiaries thereby avoiding a much worse fate, and even potential bankruptcy,” Wilson said. He added that small caps “typically lead from the trough” as markets emerge from a downturn.

Investors will ‘look through’ dismal first-quarter earnings

The coming weeks will likely bring strikingly weak first-quarter corporate earnings results and deteriorating economic data due to the impacts of the pandemic. However, each of these batches of data will ultimately reflect already widely known weakness stemming from the global pandemic, and therefore not likely trigger a renewed, deeper sell-off in equities, the analysts said.

“Despite the likely steady stream of weak earnings reports, 1Q earnings season will not represent a major negative catalyst for equity market performance,” Kostin said. He expects first-quarter earnings per share for S&P 500 companies will decline 15% over last year.

“While earnings season always conveys backward-looking data, rarely has the information content of quarterly earnings reports been as outdated as the figures U.S. companies will release starting this week,” he said. “We expect investors will mostly ‘look through’ reported 1Q results, which will capture only the start of shutdowns that began at the end of the quarter. In fact, many investors we have spoken with have discounted 2020 earnings altogether, and are focused instead on the outlook for 2021.”

Goldman Sachs’ base case, or most-likely scenario, is for S&P 500 earnings per share to drop by 33% in 2020 to $110, but then rise by 55% in 2021 to $170 – or slightly above the $165 that S&P 500 companies earned in 2019.

But in the firm’s downside scenario, S&P 500 earnings per share could fall to $70 this year and then rise to just $115 in 2021, which would take place “either because the path to economic normalization is slower than most investors and policymakers expect or because of lingering economic impact in the form of permanent business closures and high unemployment even after the spread has been controlled,” Kostin said.

Wilson echoed these sentiments, saying that investors were already looking more toward the margin of rebound in 2021 over the depth of the declines at the start of this year.

“For 2021, the snap back is related to the severity of the decline in 2020 – the worse the decline the bigger the bounce,” Wilson said. “The net effect of this is that our EPS forecasts don’t change much for 2021 which is the year that really matters for stocks.”

Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck

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