Well it’s that time of the week again.
That time when Goldman reveals the second, third, and fourth, most asked questions from client meetings.
I say “second, third, and fourth” because you damn well know that the “first” question is always this:
When was the last time anyone there talked to Gary Cohn and what’s he planning on doing to help turn that clown mobile in Washington around?
On the heels of Donald Trump’s pledge to airline executives that “something phenomenal is coming in the next 2-3 weeks on taxes,” the White House was left to scramble around and figure out how to make the President’s ad hoc promise come true.
As Bloomberg reported on Friday, Gary Cohn is on the job. To wit:
- President Trump will have a tax plan to present that is separate from his proposed budget and is expected in the next few weeks, a White House official says.
- Top White House economic adviser Gary Cohn and his team are working on the plan and unidentified congressional leaders are in the loop, official says
- Official asked not to be identified because plan still under development
- NOTE: Cohn is former Goldman Sachs president, now director of Trump’s National Economic Council
- White House spokeswoman Lindsay Walters no details
Whatever. What they meant was: “top White House officials are running around with their hair on fire now that Trump accidentally gave his team a de facto deadline to deliver something on taxes.”
In any event, Goldman says that although clients realize that this administration is batsh*t crazy, they’re still sticking with the reflation narrative – for now.
The prospect of rising inflation and interest rates supports our forecast for a flat 12-month S&P 500 return to a year-end target of 2300. Solid economic activity and potential policy tailwinds should help S&P 500 earnings rise in 2017 by 10% on an operating basis (to $116) and by 5% on an adjusted basis (to $123). A tightening labor market and growing inflationary pressure should accelerate the Fed’s pace of tightening and lead to higher interest rates.
Past environments of rising inflation and interest rates have generally been associated with falling valuation multiples. S&P 500 currently trades at 20x our forward operating EPS forecast and 19x adjusted EPS. Our year-end target reflects a roughly one multiple point compression in forward P/Es to 19x and 18x, respectively. In addition, investors are already positioned for strong growth. On a scale from 0 to 100, our Sentiment Indicator based on futures positions registered 93 this week and implies downside risk to the market during the next month.
Exceptionally low volatility belies the uncertainty that continues to feature in our conversations with clients. The S&P 500 has moved less than 1% intraday for the last 39 trading days, the longest streak in at least the last 35 years. Meanwhile, the US Economic Policy Uncertainty Index last month ranked in the 82nd percentile since 1985. Three weeks into the new administration, clients continue to focus on the potential for tax reform, fiscal expansion, and deregulation as well as the risk of disruption to trade and the difficulty of predicting the implementation of proposed reforms.
Despite the uncertainty surrounding government policy, most clients share a belief in the theme of “reflation.” Boosted by a global shift toward fiscal stimulus, asset markets began to price higher future inflation following last summer’s Brexit vote. The election of Mr. Trump in November provided a catalyst for inflation expectations to jump even higher, with investor optimism about fiscal spending and domestic job creation lifting US 10-year breakevens above 2.0% in December for the first time since 2014.