700 points separates Goldman’s year-end 2022 target for the S&P 500 from Morgan Stanley’s forecast.
Goldman’s David Kostin said Tuesday the US benchmark will climb 9% to 5,100 by the end of next year. Including dividends, the bank sees US equities returning 10%. By contrast, Morgan Stanley’s Mike Wilson said this week he expects the S&P to fall to 4,400 by next December.
“Profit growth has accounted for the entire S&P 500 return in 2021 and will continue to drive gains in 2022,” Kostin wrote, in Goldman’s year-ahead US equity outlook. Earnings will grow 8% next year to $226, and by 4% in 2023, the bank said.
Goldman’s EPS forecast is actually a dollar lower than Morgan Stanley’s for 2022. While Morgan expects the index to de-rate to ~18X, Goldman sees the S&P’s multiple staying “roughly flat” to end 2022 near 22X.
Note that Goldman expects the Fed to start hiking rates in July, while Morgan still believes liftoff won’t come until 2023. Calls for an accelerated taper and preemptive hikes to help bring down inflation get louder by the day.
“The upcoming rate hikes will not derail the bull market, but the historical experience during Fed tightening cycles suggests further valuation expansion is unlikely,” Goldman said Tuesday, noting that over the past five hiking cycles, multiples were generally flat in the six months on both sides of liftoff.
Goldman expects 10-year yields to reach 2% by the end of 2022. Policy uncertainty should abate, the bank said, and consumer confidence should rebound. The impact of higher corporate taxes should be pushed into 2023, when overall index EPS will take a $5 hit from tax reform.
Previously, Goldman expected corporate tax provisions included in Democrats’ fiscal plans to take effect next year. The sector with the most to lose from tax reform is Info Tech.
Equity valuations are likely to find support from the corporate bid and household demand (figure below), on Goldman’s view. After all, “there is no alternative,” as they say. And it’s not exactly as if cash will suddenly become attractive (as an asset class) just because rates aren’t zero.
“Equity allocations typically increase most when consumer confidence increases, policy uncertainty declines and growth expectations rise, suggesting a strong 2022 macro environment could further support rising allocations,” Kostin wrote.
Buyback authorizations hit a record in 2021, exceeding $1 trillion (figure on the left, below). Additionally, corporates are flush with cash in aggregate.
Plainly, that suggests the corporate bid will be robust, notwithstanding any impact from a prospective buyback tax, which Goldman expects to be “marginal,” if it’s even perceptible.
Although household demand will obviously fall from 2021’s anomalous surge, there’s still some $5.5 trillion in cash parked in money market funds, more than a trillion more than pre-pandemic levels (figure on the right, above). In addition to the absence of viable allocation alternatives, rising inflation should also make equities appear attractive.
Needless to say, the full piece is voluminous, and there are myriad points worth highlighting. I’ll reserve them for separate treatment. The upshot from the bank’s 35-page outlook is, as noted, that US equities should rise 9%. So, right around the historical average.
From a strategic perspective, Kostin said it makes sense to “own virus- and inflation-sensitive cyclicals, avoid high labor cost firms and buy growth stocks with high margins versus low margin or unprofitable growth stocks.”
Goldman kept its Overweight call on Tech which the bank has maintained for a half-decade.