These Are The Four Questions Goldman’s Clients Want Answered
By Tyler Durden
There is little joy for bulls in David Kostin’s latest weekly kickstart, in which the chief Goldman strategist says that “the S&P 500 has reached our 2016 year-end target of 2100. We expect that the index will remain at this level given tepid US GDP growth, a mixed earnings outlook, and elevated valuation. Corporate repurchases are the main source of US equity demand. We forecast S&P 500 gross buybacks will rise by 7% to $600 billion in 2016. S&P 500 cash M&A spending surged 116% last year but we forecast a 40% decline in 2016 to $240 billion, reflecting increased regulatory scrutiny, new tax policies, and political and policy uncertainty.”
With that rather gloomy forecast out of the way, Goldman then goes on to list the four most pressing questions troubling its clients as of this moment, starting with “Where to from here?” As Kostin writes, this “is the question we receive most frequently from investors now that the S&P 500 has reached our year-end 2016 target. After an 11% plunge to start the year, US equities have rebounded by 14% and have now posted a 2% gain YTD. We maintain our forecast that S&P 500 will end the year at 2100, unchanged from the current level.”
Broad “big picture” questions aside, here are the four things Goldman’s clients would like answered asap.
1. Why will US stocks post a flat return through year-end? Mediocre economic growth, a mixed earnings outlook, and high valuation will limit further appreciation. (a) The US economy is growing, albeit at a tepid pace. Our colleagues in US Economics research estimate US GDP growth will average 1.8% in 2016. Weak end demand implies low sales growth and profit margins have been stagnant for the past five years. (b) The earnings outlook is cloudy because, although operating EPS will rise by 9% to $110 per share, adjusted EPS will be flat for the third consecutive year. Negative EPS revisions are likely during the course of the year. (c) Valuation is stretched given the S&P 500 index trades at the 86th percentile of long-term historical valuation based on seven metrics: P/E, EV/sales, EV/EBITDA, PEG ratio, free cash flow yield, cyclically-adjusted P/E, and P/B. Moreover, the median stock in the S&P 500 trades at the 96th percentile of historical valuation.
2. How much do buybacks contribute to the overall demand for shares? Corporate repurchases (net of share issuance) are the main source of net demand for US stocks. We forecast households, foreign investors, and pension funds will all be net sellers of US stocks in 2016.
Our recent report Flow of Funds: Buybacks drive demand, foreigners retreat (April 14, 2016) analyzed the supply and demand for shares and updated our forecasts. Corporate demand for US equities equaled $561 billion in 2015, a 40% jump from the prior year and the second-highest level since 1952 (2007 totaled $721 billion). In contrast, foreign investors sold $103 billion of US stocks in 2015, the lowest level of annual demand in 64 years. China, Canada, …read more
Source: These Are The Four Questions Goldman’s Clients Want Answered
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