Goldman Sachs: 3 Reasons the S&P 500 is Headed to 2100

With a modestly positive economic environment, high profit margins, improving private investment, high budget deficits and a belief that stocks are cheap….the bulls get increasingly optimistic.  This is from Goldman’s Chief Equity Strategist David Kostin and his team:

We are raising our S&P 500 dividend estimates and index return forecasts for 2013 through 2015. We expect S&P 500 index will rise by 5% from the current level to 1750 by year-end 2013, advance by 9% to 1900 in 2014, and climb by 10% to 2100 in 2015. We expect a 3-month return of 2% to 1700 and a 10% return during next 12 months to 1825. Our previous 2013-2015 year-end targets were 1625, 1775, and 1900, respectively.

1. We expect S&P 500 dividends will rise by roughly 30% between 2013 and 2015. We forecast dividend growth of nearly 11% in both 2013 and 2014 and about 9% in 2015. Our earnings forecasts remain unchanged but we have boosted our payout ratio assumptions. While 1Q year/year earnings growth of 6% was in line with expectations, dividends surged by 12% led by surprisingly large hikes from Financials and Consumer Discretionary firms. Our dividend forecasts are now in line with the dividend swap market for 2013 and 2014 but slightly above the implied levels for 2015 through 2022. Together our dividend and price target forecasts imply an S&P 500 annualized dividend yield of 2.2% from 2013 to 2015.

2. Our US Economists forecast above-trend growth in 2014 for the first time in six years. In advanced economies, the final year of economic stagnation before GDP growth exceeded trend has been associated with P/E multiple expansions averaging 15%. Our year-end 2013 forward P/E of 15x would be 14% above last year’s 13.2x. The S&P 500 currently trades at 14.6x bottom-up consensus and 15.0x our top-down NTM EPS estimates.

3. The macro investment environment supports an above-average S&P 500 valuation. Our standard valuation approaches point to a P/E multiple of 14x forward earnings. However, our revised forecast estimates an S&P 500 P/E multiple of 15x-16x during the next three years that is above the long-term average but in line with the post-1990 experience. The S&P 500 forward P/E multiple has averaged 12.9x since 1973 but 15.3x since 1990.”


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Cullen Roche

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services. He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.

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  • Joe 401k

    What motivation does a company have to raise dividends by 30%? Seems to me a company will raise dividends when it is either trying to get people to buy stock or else when it is flush with cash. Everyone is already grasping for stock and from what I understand, many companies have been hoarding cash for quite some time. Why release hoarded cash now?

  • SS

    It looks like dividends peaked in Q3 2012. How realistic is Goldman being when they say dividends will rise 30%?

  • ReturnFreeRisk

    The Fed does not care about any financial excesses. Barring a shock and a resultant recession, the market is going to run up 30-50% from her in a zero interest rate regime that will last another 3-5 years. This talk of tapering bond buying is just that – talk. Look for Bernanke to quash all near term speculation of tapering.

  • Greedsgood

    Amazing how much they have to reach now to build the bull case. Nice bit of data mining to illustrate the 15.3x multiple as warranted. What if we excluded 5 years – 1997-2002 when the PE ratio was unarguably at bubble levels (average of 31.5)

    What’s a fair earnings multiple for this environment, and what are the drivers?

    Yes, the ERP is higher than usual given the low ZIRP risk-free rate (although it should in reality reflect non-artificial levels, closer to the inflation rate ~2%). When are you willing to pay a higher multiple for a given stock? Obviously, when the profit GROWTH is high (PE/G) and you can get your ERP + additional growth which allows that multiple to decline over time. That’s the difference between paying 9x for AAPL or 90x for CRM – It’s the growth rates. With profit margins at extremes, we need global revenue growth.

    Yardeni’s blog has a nice piece today on global revenue growth – flat in recent quarters, and best case up 5% in future years. With those sales growth rates for the S&P500, profit growth of 7-10% would be the best expectation. What multiple does that growth justify?

  • Anonymous1

    Wholeheartedly agree with this one, zirp as far as the eye can see. Ol’ Ben had a good taste of what it’s like to lose the stock market and will fight tooth and nail to keep the status quo (which for the Fed is good enough). For a fundamentalist like myself if you look at a CAT, FDX, IBM,HPQ there’s no reason to buy these behemoths other the Jeremy Siegel theory of it’s just going to go higher. Ben wants stocks up no matter what, and in spite of what Goldman Sachs may say the fundamentals do not justify multiple expansion. In their prime no one was forced to buy MSFT,APPL,WMT,INTC investors bought those stocks because of outstanding underlying fundamentals. Now it’s just the Fed and Abby Joseph Cohen type hype.

  • Digitking

    Dividend pay-out ratios are at historically low levels and could just revert to the mean, even adding back stock buybacks. Plus what else is a company going to do with all they cash has on it’s balance sheet?

  • Anon

    You’re placing all your faith in the fact that QE is all it will take to keep inducing people to bid stocks higher and higher regardless of what fundamental factors may present themselves.

    Maybe you will be right… but I simply don’t have that kind of faith. I believe that the effect of QE is merely psychological and the fact that one day soon the market will go down meaningfully DESPITE QE could have a dramatic impact of this almost religious belief in QE.

    What happens if people stop believing?

  • fin

    Pay down their debt? Aren’t debt level is also historical high for SP500? Besides, just a few companies hold most cash.

  • LRM

    Sometimes I have to wonder where the change of sentiment comes from from day to day. The recent posts were leaning towards a slowing economy and the highlights were the recent market indicators turning down etc.

    Lumber prices down but Home Depot sees nothing but blue skies. Goldman or was it Citi said the S&P would finish the year lower than what it was when at time of that article, and today Goldman sees 2100 .
    What changes so much from day to day ?

  • Agustin Castro

    The company continues to expect to increase the full-year dividend it pays shareholders by 20 percent in each 2013, 2014 and 2015 – to per-share amounts of $1.44, $1.75 and $2.11, respectively. Williams’ full-year dividend for 2012 was $1.20 per share.

  • http://pragcap Michael Schofield

    It don’t git any better than this! Buy, just buy, yer good til 2015! Or 2022! LOL, GS kills me

  • Aaron

    Must be nice to have a crystal ball. How do people live with themselves after making predictions like this?

  • Anonymous1

    Yes another visionary Goldman report “prepared for investors” by the same folks who gave America the Abacus deal and the use of AIG as a financial toilet. You may also recall their outstanding oil report from ’07 setting a 200 per barrel price target.

  • Nico

    Cullen to join the last comments, what is the value of posting such things? you must know GS tracking record on their predictions, it is abysmal

    unless you are using them as a contrarian indicator like i do

  • Cullen Roche

    Just trying to provide lots of different views. I know most of it is junk, but there are useful nuggets in lots of this stuff. This business is mostly about digging through the trash for insights and pieces of the puzzle. Maybe this post is all garbage. Welcome to the business. :-)

  • Andrew P

    Bernanke has to taper over the next few months because the debt ceiling has been reached and issuance will drop off until probably August. And Gov’t revenues from F/F are soaring and are reducing the deficit.

  • ReturnFreeRisk

    I forgot to say this Anon. It will crash after running up. Just like the other bubbles came crashing down. Just saying we are in the beginning of another one forming and Bernanke does not care.

  • Andrea Malagoli

    Judging from today’s reactions to Bernanke’s comments, there is only ONE reason for the markets to continue to go up. It is called QE.

    Sure, we have all discussed how QE does not ‘print’ money that ‘enters’ the stock market. However, whatever the mechanism, the cause and effect relationship is there. Look at today …

  • Anonymous1

    I raise my coffee this morning in a toast to ReturnFreeRisk a true visionary who’s call was perfect in it’s clarity. I’ll be leaving my desk now to shop for a Dow 17,000 hat as I’ve been invited to Jeremy Siegel’s party.

  • InvestorX

    And…the market has already crashed in the face of QE (and TARP) – see the first 3 months of 2009. What stopped the wreckage was the abandonment of mark-to-market rules for banks.

  • InvestorX

    It is a good reflection of the sentiment of the (professional) perma bulls – they feel completely full of themselves now.