It was inevitable.
For quite a while, Goldman held onto their year-end S&P target of 4,300 despite US equities’ steady, upward grind and falling US yields.
I suggested, on at least three occasions that I can remember, that the bank would eventually be compelled to “mark-to-market,” especially considering the 4,300 target featured an embedded 10-year yield forecast of 1.9%. Keeping the modeled growth and risk premium constant and inserting a 1.6% 10-year yield instead, the model-implied fair value for the index was 4,700.
Sure enough, Goldman raised their S&P target to 4,700 on Thursday, suggesting 7% upside from current levels. This comes two weeks after JPMorgan raised their year-end target (to 4,600). Goldman sees the index at 4,900 at year-end 2022. The figures (below, from Goldman), sketch the new projections and provide a snapshot of the accompanying assumptions.
“The combination of higher-than-expected S&P 500 earnings and lower-than-expected interest rates drive our upgraded price targets,” the bank’s David Kostin said Thursday, noting that so far in 2021, earnings growth has accounted for all of the index’s price return.
Obviously, the bank’s targets depend on rates and the prospects for corporate taxes. Kostin described the outlook for both as “uncertain.” That’s an understatement.
Rather than the previous 1.9%, Kostin now incorporates a 10-year yield assumption of 1.6% at year-end with a forward multiple of 22X. In a scenario where the recent drop in US long-end yields doesn’t at least partially retrace (higher), stocks could conceivably see more upside, assuming no growth shock.
“If interest rates were to remain near current levels without a major downgrade to growth expectations or risk sentiment, the implied S&P 500 fair value at year-end would equal 4,950,” Kostin remarked.
Goldman’s baseline assumption is that tax reform passes later this year. If that doesn’t happen, EPS estimates for 2022 would obviously be higher, as would the bank’s year-end 2021 target for stocks.
The simple chart (below, from Goldman) shows the various scenarios the bank is currently pondering.
Needless to say, Kostin goes into quite a bit of detail over some 20 pages explaining the new forecasts, rationalizing the new targets and otherwise expounding on various upside and downside scenarios.
Much of the additional color is useful and I’ll likely allude to it at various intervals over the next several sessions. But one thing I’ve learned over the past half-decade is that when Goldman (or JPMorgan) hikes their forecast for the world’s risk asset proxy par excellence, most market participants want the broad strokes first. Folks are only receptive to lengthy editorializing around any granular details once they’ve had the main points presented on a large piece of digital poster board, preferably with simple bullet points and colorful bar charts.
I’m just kidding. But not really. Investors and traders aren’t much different from “normal” people in at least one regard: They crave short, curated content, tailor-made for short attention spans.
In any case, Kostin flagged a few obvious risks. “In the near term, we expect upward revisions to EPS estimates and declining concerns about the Delta variant spread to drive equity upside, but the path of the virus and its economic impact have proven difficult to predict,” he wrote, noting that later this year, angst around the path of fiscal and monetary policy could “drive volatility.”
In addition, he cited concentration risk, which is just a euphemistic way of saying the regulatory overhang for the FAAMG contingent is an annoyance for any bull case given index weightings.
“The extreme current degree of equity market concentration among the largest US stocks means that S&P 500 index upside will be particularly vulnerable to any surprise developments with respect to the business or regulatory outlooks for the mega-cap market leaders,” Kostin cautioned, adding that “the path to our year-end target is unlikely to be a smooth one.”
Goldman’s target for the benchmark is now the highest on the Street.
