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Why Portfolio Managers And Executives Think Goldman’s 2021 S&P Forecast Is Too High
When Goldman asked domestic and international portfolio managers, hedge funds, sovereign wealth funds, and corporate executives what they thought of the bank's 2021 outlook for US equities, those who said 4,300 on the S&P is too bullish generally cited inflation risk.
"They argue that the vaccine-supported US economic recovery we anticipate will lead to rising prices for goods and services, inflationary concerns will then spark a backup in Treasury yields, and that in turn will translate in
it is ironic that the market’s need to climb a wall of worry has the market focused on inflation when the majority of inflation is in the price of assets not needed or owned by the vast majority of the population. As an example the MEDIAN PE of the SP500 is 34.4. That is insane inflation of stock price. Yes, we could have that median PE drop back down to the long-term average if earnings double over the next year. Alternatively, we could have the price of stocks drop in half. Maybe the average stock investor believes that he/she should never get paid back in his/her lifetime via earnings… Or, as Goldman seems to believe — one should not get paid back in via earnings in one’s child lifetime either.
Here is my observations about NYC and large urban area rental market. It comes from actual experience since I live in yuppy Brooklyn in a coop. The folks selling and moving out are folks that would have likely done so anyway. The pandemic just acted as an accelerant. In our coop the leavers this year have been couples with 2 kids who are getting past the 1st grade and have a parent who is moving in or retirees who were likely to leave anyway for sunnier/cheaper locales. The demand side is low since who wants to move into a city right now in the teeth of a pandemic? That has accelerated the movement out- but it has just hastened things for a cohort that was moving away anyway. What happens when the disease gets under control? My bet would be cities would be even more attractive. The real office rents will be effectively lower, since many companies will now use a hotel hybrid model in the future. I can tell you from experience, working from home full time is no panacea. But there is an attraction to more flexible work arrangements where you come into the office 2-4 days per week. Once entertainment and services really reopen in 1-2 years I would bet anything that NYC as a global center of commerce will bounce right back. The young folks and businesses will continue to want to relocate where a diverse and well educated labor force is in place. And the rents and pricing of housing has only become more attractive. This will take a number of years (probably 3-5) to become evident. Memphis and Boise will do fine as long as the regional economies there are doing ok. So will many other mid-sized cities. But the big ones also will be doing fine. The areas left out will be areas/regions without much pull of a university, government or manufacturing base to help them- just as it has been for some time. There could be an exception to an area open and encouraging of new immigrants.
As far as inflation goes- you might get a small bounce from some trends cited such as a temporary post pandemic bounce with an easier monetary policy. But the demographics in the US augur against a major price surge everywhere and for everything. Relative prices of goods and services may fluctuate but a high persistent overall inflation rate just does not appear to be in the cards with the kind of aging/slow growing population in the developed world. Right now deflation is still a greater risk for what we look forward to- absent some major policy changes.
If inflation remains subdued the corps can’t raise prices on sales and operating profit growth will be driven by op leverage and productivity. While wage gains will remain subdued in spite of the (hopeful) productivity gains. Therefore earnings growth will be challenged and investment will probably remain weak. But rates may stay tame (but how much lower and therefore how much PE expansion can happen from here?).
If inflation picks up rates go higher killing PEs and selling prices and wage gains might increase and potentially earnings could go higher.
But can interest rates stay this low for a sustained period? There was an old saying 10yrs should equal nominal GDP. So if you think we are in a 1.5% real growth world with 1% inflation can 10 yrs be at 1% forever?
Even today, the real return after tax of 10 years are not attractive unless you think deflation takes hold but then what happens to profits?
If you own a home inflation means something different than if you want to buy a home. If you are poor it is different than if you are wealthy.
The tail winds of decent profits (mainly helped by certain sectors) and lower and lower rates may just be in the process of being shaken up. Each person, investor will make their decisions but t is not monolithic.
Personally, these are tough times to be a professional investor. ONe can imagine a number of future paths though most are not as attractive as many suggest.