This could be really shitty timing and I am by no means sure, given the circumstances, that today is the day I would have picked if I were David Kostin to go out on a limb, but Goldman is out upping their year-end S&P target to 2400 from 2300 (which would still mean lower from here mind you).
Generally speaking, Goldman has been a little less sanguine out the outlook for stocks amid an otherwise bullish crowd. More specifically (and ironically considering how many former employees the bank has installed around Trump), Goldman has been pretty downbeat on this administration’s ability to get anything done.
But I guess on Wednesday they figured “fuck it, why not?” because we got this bright and early:
Still, you’ll note that Goldman doesn’t deliver a glowing endorsement of a long US equities position in the commentary you’ll read below. They still see the S&P falling into year-end on multiple contraction.
Another thing to keep in mind here is that Goldman isn’t buying the Deutsche Bank line about value outperforming growth going forward and the reason is simple: Goldman isn’t as upbeat about the prospects for an imminent reversal in the incoming econ data.
It’s a long, and rambling affair, so we’ll just give you the executive summary and some charts, which is really all you need, although we might excerpt a few more passages later.
We raise our year-end 2017 S&P 500 price target to 2400 from 2300, reflecting a 1% decline over the next six months. This return would represent a 27th percentile event since 1975. We expect EPS growth of 9% this year will be offset by a 4% contraction in the forward P/E multiple to 17.3x from 18.1x. The prospect of accelerating inflation, higher policy rates, and rising 10-year bond yields will weigh on S&P 500 valuation. Our 12-month price target of 2450 represents a 1% price gain (+3% total return including dividends). A lower-than-expected rate of inflation and persistently low bond yields would support a higher level of the market.
We increase our S&P 500 adjusted EPS estimates to $129 in 2017 and $139 in 2018 (from $123 and $129). The increase stems from strong 1Q results and higher expected growth in Financials and Info Tech. We expect S&P 500 sales will grow by 5% in 2017 and 2018 and margins will expand by 22 bp to 9.7% in 2017 before peaking at 9.9% in 2018. Our forecast assumes average 2017 US GDP growth of 2.1%, average 10-year US Treasury yields of 2.6%, and no change in corporate tax rates.
Financials (+13%) and InfoTech (+9%) will deliver the fastest EPS growth in 2017 outside of the Energy sector. We continue to recommend investors overweight these sectors. Five popular growth stocks (FB, AMZN, AAPL, MSFT, and GOOGL) account for 13% of S&P 500 market cap but only a relatively small share of sales (6%) and earnings (10%). Goldman Sachs analysts forecast these firms will grow revenues 3X faster the market and have roughly 2X the margins.
We recommend investors focus on companies with strong secular growth and margin expansion prospects. Growth stocks typically outperform in modest economic growth environments, which we expect will persist in 2017 and 2018. We highlight 27 secular growth stocks that GS analysts expect will boost sales by 10%+ in both 2017 and 2018 and trade at reasonable valuations (see Exhibit 45). Investors should also focus on the few stocks expected to expand margins by 50 bp or more in both 2017 and 2018, given our forecast for just 35 bp of aggregate S&P 500 margin expansion during the next two years (see Exhibit 46).