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Leading investment bank says US shares could fall 10%, something that could have serious implications for the ASX 200 index

A team of analysts at Citigroup has raised its target level for the S&P 500 for the end of this year. Despite the lift, however, the investment bank’s new estimate is nearly 10% below the current level of the benchmark US stock index.

Citigroup upped its estimate to 2,900 from the previous 2,700. The analysts believe that ‘powerful fiscal and monetary stimuli’ that will likely soon rain onto the market justify a bump in its target.

They still feel, however, that the stock market in general and the S&P 500 specifically are in for a tough time in the second half of this year.

Bumpy ride

The old saying goes that if US markets sneeze, the ASX catches a cold. With the S&P/ASX 200 Index (ASX: XJO) riding high at close to 6,000 – up more than 30% since its lows in March this year – if Citigroup is close to being right, the Australian share market could be in for a bumpy ride in the rest of 2020.

Citigroup’s chief US equity strategist, Tobias Levkovich, warned they ‘envision volatility for equities’ saying that good news is being priced into the markets and ‘problems are being overlooked’.

Prominent among these difficulties is, of course, the resurgent coronavirus outbreak, both in the US and here in Melbourne. With cases again rising sharply in many locations, and businesses reclosing (either by mandate or voluntarily), overall economic activity is set to constrict between now and the end of the year.

For the S&P 500 to rise substantially, Levkovich said that corporate earnings have to rebound ‘in a very meaningful way’.

That’s not going to be easy, since – despite employee layoffs and furloughs – many companies have been stuck with significant fixed costs against sudden drops in revenue.

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The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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