Need to Know

Jan. 25, 2021, 3:15 p.m. EST

Goldman Sachs is very bullish about a recovery this year. Here’s what could go wrong.

By Callum Keown

U.S. stocks have started a bumper week of earnings in subdued fashion.

Apple (NAS:AAPL) , Tesla (NAS:TSLA) , Facebook (NAS:FB) and Microsoft (NAS:MSFT) are all set to report earnings in an action-packed week that also includes the Federal Reserve’s first policy meeting of the Biden administration. In fact, nearly a quarter of the S&P 500 will report results — with those companies representing 39% of the index by market value, according to FactSet data.

The COVID-19 pandemic and the rollout of vaccines across the U.S. remain in focus as President Joe Biden gets to work. Investors will also be closely watching the U.S. fourth-quarter GDP reading on Thursday, with economists polled by MarketWatch expecting a 4% rise. Attention will also turn to the recovery in 2021.

In our call of the day , Goldman Sachs analysts were bullish on the U.S. economy’s rebound in 2021 but said there were three big risks to the recovery. The investment bank is forecasting gross domestic product growth of 6.6% this year, which is 2.5 percentage points above the consensus. It expected a reduction in virus risk, brought about by mass vaccination, along with fiscal support for consumer spending to fuel a “midyear consumption boom” and “very strong growth” in 2021.

The most severe downside risk, the analysts noted, was the threat of a new vaccine-resistant strain of the coronavirus that causes COVID-19 — requiring a new vaccine and another round of inoculations. “Virus-sensitive spending would likely retrench while a new vaccine is developed, and although a new vaccine could be approved in less than five months, the consumption boom would likely be delayed until 2022,” said the Goldman analysts, led by Jan Hatzius, in a note. They added that preliminary evidence suggested that current vaccines do protect against the new U.K. strain but were more mixed for the South African variant.

The second most concerning risk is that virus mutations “significantly increase the bar” for herd immunity, either by being more infectious or by diminishing the effectiveness of vaccines. This scenario would also delay the consumption boom. Finally, even as the vaccination rollout and warm weather reduce the virus spread, there is the risk that consumers will be more cautious than expected, though the downside would be limited, they said.

More encouragingly, there were some significant upside risks to Goldman’s 6.6% GDP growth forecast, including households rapidly spending the savings they have accumulated during the COVID-19 pandemic and the impact of further fiscal stimulus in 2021.

This Morgan Stanley chart shows the NFIB Small Business Optimism Index diverging from the Russell 2000 (USA:RUT) index, suggesting that while sentiment may be turning negative, small-cap stocks are on the up.

The Dow Jones Industrial Average (DOW:DJIA) slipped 0.7%, or 211 points, in early trading, while the S&P 500 (S&P:SPX) fell 0.4% and the Nasdaq Composite (NASDAQ:COMP) was 0.2% lower. European stocks fell after initially climbing due to positive earnings and reports of acquisitions by online retailers Boohoo (LON:UK:BOO) and ASOS (LON:UK:ASC) . Asian shares climbed overnight, on hopes that some economies will begin to recover from the COVID-19 pandemic with lockdowns easing and vaccine rollouts progressing.

Biden’s top aides began talks with a group of moderate Senate Republicans and Democrats on a $1.9 trillion coronavirus relief package on Sunday.

Biden will reinstate coronavirus travel restrictions against foreign citizens coming to the U.S. from Brazil, the U.K., Ireland and much of Europe on Monday, according to reports, also adding South Africa to the list.

The White House unveiled details on Monday of the new Buy American executive order set to be signed by the president. It will increase the threshold and price preferences for domestic goods before the government can buy from a non-U.S. supplier. 

China overtook the U.S. as the world’s top destination for new foreign direct investment last year, according to U.N. figures published on Sunday.

Just days ahead of fourth-quarter earnings, Baird lifted its price target for electric-car maker Tesla to $728 per share from $488, saying “bias for the stock remains to the upside,” in a note on Monday.

GameStop shares (NYS:GME) surged 42% in premarket trading , after soaring 51% higher on Friday. The gains came after short selling firm Citron Research and speculative buyers organizing on Reddit clashed over the videogames retailer.

AMC’s stock (NYS:AMC) jumped 34% in premarket trading , as the movie-theater chain raised $917 million in equity to debt to help it through the COVID-19 crisis.

Flaming Lips stage unique ‘space bubble’ concert.

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