Goldman Sachs sees potential for S&P 500 bear market on Europe

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’s chief US equity strategist said.

While David Kostin’s mid-year forecast for the Standard & Poor’s 500 Index calls for a 3.7 per cent gain from last week’s close to 1,325, 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.

The June 1 report from Goldman Sachs said the most likely scenario is Greek elections resulting in the nation remaining in the euro zone.

Concern it will leave has helped drag the S&P 500 down 10 per cent since April 2, including the biggest monthly decline since September. “Financial contagion or crisis in Spain” could prompt a bear market, according to the report.

Goldman Sachs also predicted a Greek exit from the euro zone area could push the Stoxx Europe 600 Index down a further 3.8 per cent 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 per cent to 233.87 on Monday.

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 US 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 US 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.