GOLDMAN: S&P IS HEADED TO 1275

Despite the increasingly bearish tone of Jan Hatzius Goldman Sachs hasn’t lost faith in the equity markets.  They believe there have been three powerful trends driving the equity markets in recent weeks:

• September’s batch of positive macroeconomic data surprised to the upside for the first time in five months. The Goldman Sachs aggregate monthly US-MAP score measuring the magnitude and relevance of economic data hit the highest level since June 2009;

• Polls indicate the November 2nd mid-term Congressional elections will likely see Republicans gain control of the US House of Representatives and narrow the current Democratic majority in the US Senate. A divided government may reduce the policy and regulatory uncertainty that many business leaders claim has hindered capital spending decision-making; and

• Comments from various Fed officials made it increasingly clear that the Fed intends to initiate a second round of quantitative easing (QE2) following the upcoming FOMC meeting on November 2nd and 3rd. Ten-year US Treasury yields have dropped 20 bp in four weeks to 2.57%. For context, yields peaked this year at 4.0% in early April.

They see fairly limited upside for the remainder of the year and into H1 2011, however, they ultimately see the markets advancing a healthy 9%+ from current levels:

“We expect the S&P 500 will rise another 2% to reach our year-end 2010 target of 1200. We anticipate US equities will trade sideways during 1Q 2011 as economic uncertainty remains high. Our revised 12-month price target of 1275 (from 1250) reflects a potential price return of 9% from current levels. The cost of equity should decline slightly as 2011 progresses and investors turn their attention to the economic growth prospects for 2012.”

Source: Goldman Sachs