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The S&P 500's 6% decline over the past three days represents a great buying opportunity for investors, according to a note from Goldman Sachs strategist David Kostin.
An unwind of the yen carry trade, Warren Buffett slashing his stake in Apple, and concerns about an imminent recession all contributed to a sharp volatility event on Monday, with the S&P 500 dropping 3%.
However, despite the decline, the S&P 500 is still up nearly 10% year-to-date and the sell-off sparked a reset in valuations, with the index's forward price-to-earnings multiple falling to 20x.
That ultimately represents a good setup for stocks going forward, according to Kostin, who reiterated his year-end S&P 500 price target of 5,600, representing potential upside of 8% from current levels.
"Historical experience shows that investors typically profit when buying the S&P 500 index following a 5% sell-off," Kostin said.
Since 1980, buying the S&P 500 when it is 5% below its recent high generated a median return of 6% over the next three months, with a positive hit rate of 84%, according to Kostin.
Forward median returns 12-months later nearly double to 11% with a positive hit rate of more than 95%, according to the note.
The question for investors is whether the S&P 500's recent decline extends to more than 10%, as that comes with a different set of outcomes relative to a 5% drop.
"Corrections of 10% have also been attractive buying opportunities more often than not, but with weaker hit rates of outperformance than following 5% drawdowns," Kostin said.
The crux of whether a 10% correction in the S&P 500 represents a solid buying opportunity for investors is whether the economy is on the verge of a recession.
Without an imminent recession, the median 12-month forward return is 11% with a hit rate of just over 90%. But with a recession, the median 12-month forward return is just 1% with a positive hit rate of about 55%, according to Goldman.
Goldman Sachs
Several indicators, such as the Sahm Rule, have flashed, suggesting that a recession is looming, while corporate earnings have been resilient, and recent US GDP prints show continued above-trend growth.
"Following the sharp recent move, the Cyclicals vs. Defensives pair now appears to reflect the roughly 2-3% real pace of GDP growth indicated by the 2Q GDP print and our economists' 3Q GDP tracker. Our economists forecast US real GDP growth will average 2.7% in 2024 and 2.3% in 2025," Kostin said.
In other words, according to Goldman economists, a recession is unlikely between now and the end of 2025, and if that's the case, then this stock market sell-off represents a ripe buying opportunity for investors.
