GOLDMAN SACHS: S&P IS STILL GOING TO 1300
Goldman hasn’t lost that bullish feeling. In their H2 strategy note they detail the reasons why the US equity market is likely to rally 14%+ by year-end:
“Our framework for evaluating the US equity market Our framework for evaluating the US equity market incorporates four pillars – the economy, earnings, valuation, and money flow – and suggests the S & P 500 will rise approximately 14% to reach 1250 by year-end 2010.”
Goldman still believes we are in for an environment of low interest rates:
“Our US Economics team forecasts sustained low-inflation and a Fed on hold until 2012. A low rate / low inflation macro backdrop has historically been associated with positive S & P 500 returns.”
The recovery in the equity markets will be bolstered by three primary factors: earnings, valuations and money flow. Goldman believes equities are not only cheap, but that corporations are in an unprecedented position of strength:
“Earnings: Just as a discussion of the economy is dominated by macro issues, so analysis of earnings is mostly about micro. Business activity at the firm level continues to improve as measured by both the magnitude of upward sales and EPS revisions as well as the breadth of positive earnings revision sentiment. Cyclical sectors have posted the strongest upward EPS revisions . Importantly, analysts boosted the level of expected future profitability (2Q-4Q 2010) after firms announced 1Q results. Our operating EPS estimates for the S & P 500 remain $ 78 for 2010 and $ 93 for 2011. Our pre-provision and pre-write-down estimates equal $ 83 and $ 93, respectively, reflecting annual growth rates of 15% and 12%. Our earnings estimates imply negative revisions to bottom-up consensus EPS estimates of $ 82 in 2010 and $ 97 in 2011. The bear case on earnings rests on the belief that the macro data in 2H will lead to negative EPS revisions. However, forward-looking commentary at the micro or company level is not consistent with an imminent economic slowdown that many expect at the macro level.
Valuation: Both macro and micro approaches to valuation suggest US equities are undervalued. The Fed model (a macro or top down approach) suggests the S & P 500 trades 25% below fair value while P / E multiple mean reversion (micro or bottom-up) implies the undervaluation is closer to 40%. We anticipate the market will rise by 6% to 1160 over the next three months, rise 14% to reach 1250 by year-end 2010, and reach 1300 in 12-months representing a return of 19%. The S & P 500 currently trades at 12.2 x our pre-provision and write-down NTM EPS estimate. Should the market reach 1250 it would reflect a P / E multiple of 13.4x NTM EPS. A rally of 14% to year-end would rank in the 86 th percentile of six month returns since 1950 and represent a full-year 2010 return of 12%, ranking in the 59 th percentile.
Money Flow: The bear case in every client discussion relates to the contagion effect if Europe’s sovereign debt problems spread across the Atlantic Ocean. Although Federal, state, and individual balance sheets remain in extremely weak condition, corporate balance sheets remain the strongest in history. S & P 500 non-Financials cash totals $ 973 billion, and the cash / asset ratio of 10.4% is near the highest in history (2.5 standard deviations above average).”
How to play it? Goldman says we are in the “late recovery” phase. They are overweight IT, industrials, consumer staples and energy:
Source: GS
Better than expected earnings (or less bad than expected) on an oversold market. Sounds like the end-2009 on the China-SSE.
How bout the markets rally until the November elections with all the wonderful promises that come with elections and then in January when Obama has to start raising taxes to start covering the deficit the markets tank (again)? Any thoughts TPC?
Just out of curiosity, it would be helpful for GS to post their stop-loss on this trade.
Seriously, at what SPX level will it become obvious they are wrong?
talk about someone talking their book.
not buying it.
They’ve also been screaming $100 oil since 2009, so I’d say they’re wrong again.
Goldman SUCKS must be ready for some good ol distribution to their dear clients and retail investors.
Why should I trust Goldman’s public announcements???
How are they trading the market internally????
Can they fool their foolish clients again?
The Fed model (a macro or top down approach) suggests the S&P 500 trades 25% below fair value
Hasn’t the Fed model been debunked already? A model that shows stocks being overvalued in 1983 and undervalued in 2007 is not one I choose to follow.
It’s nice to see that some institutions still preach that returns experienced since the bottom in 1982 can be extrapolated into the near future and that the natural laws that governed the markets during this time period are still valid.
I hope GS is true to their convictions.
How can anyone trust economic predictions coming from financial institutions wholly beholden to this administration because of their receiving TARP cash or benefiting from other bailout mechanisms? This administration has a public record of using those who benefit from their government policies to assist in furthering their own agenda; that of the most anti-business group who’s ever occupied our national seats of power! If ever there was a time in our economic history where malevolent forces are actively and consistently at work to manipulate investors, it is now! They will build a false recovery based on our reactions to their half-truths, lies and other information manipulations, which will eventually crumble with the on-going reality of our growing public debt and stagnant private sector job growth. Let’s not play their game; instead, let’s stay small in the market, stay local with our business investments, and stay more liquid than we have before.
Goldman has at least 3 different faces, depending on the audience. I’m guessing this is the sell side (Kostin & team). It would be highly unusual for them to make a recession call and revise their eps estimates.
I had a GS guy from the buy-side equity team in the office last week and he was of the opinion that capex was about to expand based on the conversations they are having with business leaders. While admitting that a slowdown was at hand, his impression was that the corporate spending would boost GDP and jobs in Q3/Q4. Specifically, this would be bullish for info tech.
Abby Cohen is Goldman’s chief equity strategist, or holds some similar title. I’ve been noting her calls since the Dot.com days. Here is her record:
During the dot.com bust from 2000 ~ 2002, she was bullish all the way down and completely missed the mark.
In Q4 of 2007, she was predicting that market (S&P 500) would end the year around 1600~1700, and as far as I know or could remember, she again missed the market’s fall and was definitely not bearish throughout the crisis.
And in her Barron’s mid-year roundtable interview came out 2 weeks ago, she’s predicting that S&P would end the year 1250 ~ 1300. S&P at today’s close: 1030, ending the worse quarter ever since the crisis.
My question is: How could someone with such an abysmal track record manage to keep her job at Goldman? Obviously her compensation or her job is NOT tied to the accuracy of her calls, or else she would have been fired long ago. Can anyone tell me how someone who couldn’t have been more wrong on the market over a 10year period manages to keep a senior position at Goldman?
Mike….It has to be because of her looks….don’t ya think !!
As much as we deride GS, I think in this instance I think there is a chance for a huge rally around early to mid August (up to 1275). My reasoning for this is that QE 2.0 will come via the Fed guaranteeing muni bonds (specifically states). I refuse to believe that the fed gov will let states flounder. Also the bulk of the unemployed will have exhausted their 99 weeks of unemployment. I think the muni bonds will probably concentrate on states’ infrastructure or even make work project. Right now I think fed gov are exacting their pound of flesh from the states in the form of diminished states’ rights. The appearance of BB and Obama recently foreshadowed something coming out of cooperation between the Fed and the executive branch.