Goldman Sees ‘Choppy’ Stocks. Big Selloff ‘Unlikely’

Goldman’s David Kostin doesn’t expect much upside for US equities through year-end.

That’s mostly because he raised his price target for the S&P months ago.

Kostin, unlike some of his counterparts across the Street, saw the writing on the wall. With the US benchmark up 11% from the March lows, he raised his target from 4,000 to 4,500 in early June. Just four weeks later, the S&P was already there.

On Friday evening, Kostin said he doubts the so-called “Magnificent 7” are going to abruptly de-rate. “Resilient economic growth, falling inflation and A.I. optimism suggest a valuation ‘catch down’ of the top seven stocks is unlikely,” he wrote.

Although you could argue that stocks should trade on a lower multiple these days given the distinct possibility that the macro regime has shifted, if you use the 10-year median and exclude mega-cap tech, the S&P isn’t actually trading all that rich.

Kostin conceded that elevated real yields will likely prevent further multiple expansion, but nevertheless said the balance of risks around his year-end S&P target is to the upside.

For example, if the Fed’s done, as Jan Hatzius believes, market participants could convince themselves that the highs are in for yields. In a hypothetical scenario where reals fall 25bps and the real yield gap is unchanged, there’s scope for the S&P to trade up to 4,675.

Note that Goldman’s EPS forecasts for this year and next are on the bullish end of the distribution.

But uncertainty around the trajectory of inflation could make for a bumpy ride. Goldman does expect MoM core CPI prints to temporarily re-accelerate, and consumption may slow in Q4 as student loan payments and higher mortgage rates bite. At the same time, Goldman’s sentiment indicator suggests positioning is still stretched, leaving some scope for de-risking in the event of adverse developments.

The bank highlighted a trio of investment recommendations headed into Q4. Two are straightforward: You want to own companies that are focused on returning cash to shareholders in case we’re late-cycle, and you want to avoid companies that are exposed to higher interest expense.

“When investors perceive there to be little economic slack late in the cycle, they are generally skeptical of large plans to invest for growth due to uncertainty about the likely returns on those investments,” Kostin wrote, adding that although the “long-maturity, fixed-rate debt structures of S&P 500 companies and the ease with which they can tap into capital markets mean [those] firms are generally insulated from higher rates, floating rate debt accounts for 30% of the debt for Russell 2000 firms.”

The bank’s other recommendation: Think about put spreads. Specifically, the potential max payout on a 5%-wide structure that buys a three-month put with a strike 2% below spot and sells a three-month put with a strike 7% below current levels ranks in the 92%ile on a quarter century lookback.

Investors, Kostin remarked, might consider hedging “against modest near-term downside risk,” but described a “major” selloff as “unlikely.”