Goldman Sees Stock Plunge Then Surge

Tyler Durden's picture

Goldman's equity strategist David Kostin has been very quiet for the past year, having not budged on his 2012 year end S&P target of 1250 since late 2011. Today, he finally released a revised forecast, one that curious still leaves the year end forecast unchanged at a level over 200 points lower in the S&P cash, and thus assuming a ~15% decline. The reason: the same fiscal cliff (which would otherwise deduct 5% in GDP growth) and debt ceiling debate we have warned will get the same market treatment as it did in August of 2011 when the only catalyst was a 15% S&P plunge and a downgrade of the US credit rating. However, one the fiscal situation is fixed, Kostin sees only upside, with a 6 month target of 1450 ("We raise our medium-term fair value estimates for the S&P 500 in response to openended quantitative easing (QE) announced by the Fed."), and a year end S&P target of 1575, calculated by applying a 13.9 multiple to the firm's EPS forecast of 114. Of course, this being bizarro Goldman Sachs it means expect a continued surge into year end, then prolonged fizzle into the new year. Why? Because there is not a snowball's chance in hell the consolidated S&P earnings can grow at this rate, especially not if the Fiscal Cliff compromise is one that does take away more than 1% of GDP thus offsetting all the "benefit" from QE.

Simply said, companies who have already eliminated all the fat, and most of the muscle, and are desperate for revenue growth to generate incremental EPS increase, have not invested in CapEx at nearly the rate needed to maintain revenue growth (see How The Fed's Visible Hand Is Forcing Corporate Cash Mismanagement) having dumped all the cash instead in such short-sighted initiatives as dividends and buybacks. Also, recalling that revenues are now outright declining on a year over year basis, and one can see why anyone assuming a 14% increase in earnings in one year, is merely doing all they can to make the work of their flow desk easier.

From Kostin:

Equities are attractive for long-term investors but face near-term risks. We forecast S&P 500 will reach 1575 at year-end 2013 based on our new 2014 EPS estimate of $114 and a fair value P/E of 13.9X. The FOMC’s open-ended easing program allows investors to look past current stagnant economic growth and focus on corporate fundamentals. So far QE has reduced the equity risk premium but not yet improved growth expectations. However, in the near-term we apply a valuation discount due to fiscal policy uncertainty. Our year-end 2012 price target remains 1250

  • Downside risk through year-end stems from ‘fiscal cliff’ uncertainty Investors are too complacent that Congress reaches compromise on the divisive issues of taxes and spending during the six weeks between the Nov 6 election and Jan 1 when $576 billion of fiscal contraction starts.
  • New QE policy supports rising EPS in 2014 and the market will follow Although Congress may stumble, we assume it reaches agreement in early 2013  to delay full impact of the ‘fiscal cliff’. Open-ended QE has eased financial conditions and will continue to support GDP growth. We raise our 2013 S&P 500 EPS estimate to $107 and introduce a 2014 estimate of $114.
  • S&P 500 will establish a new high of 1575 at year-end 2013 We forecast S&P 500 will reach 1575 by year-end 2013, 9% above current and 1% above the 2007 peak. Once policy risks are addressed investors can focus on the trajectory of EPS growth, high ROE, and valuation metrics.

We apply a valuation discount to S&P 500 through year-end due to fiscal policy risks but see attractive upside over the medium-to long-term. Open-ended QE allows investors to look past current stagnant economic growth and assign valuation consistent with strong fundamentals. We introduce a 2014 EPS estimate of $114 and a year-end 2013 S&P 500 target of 1575 but maintain our 2012 year-end target of 1250.


Two of the three pillars of our 2012 framework for analyzing the US equity market have stood firm, but one has not – valuation. US GDP growth has been below trend at 2% and our top-down 2012 S&P 500 EPS estimate has remained unchanged at $100 since the start of the year. Meanwhile, consensus sales and earnings estimates have dropped by 1% and 5%, respectively, since early 2012. Despite that, valuation is notably higher.


Our expectation that S&P 500 valuation would remain flat in 2012 in the face of stagnating economic and earnings growth has been incorrect. Investor response to Fed and ECB policy actions since June 2012 was far more dramatic than we anticipated. The forward P/E multiple has expanded by 15% to 13.4x and S&P 500 has advanced by 15% YTD, reversing the pattern of 2011 when EPS rose by 15% but S&P 500 ended flat at 1258.


We raise our medium-term fair value estimates for the S&P 500 in response to openended quantitative easing (QE) announced by the Fed. The FOMC’s commitment to pursue a loose monetary policy until unemployment falls should allow investors to look through the current period of stagnation and assign a valuation multiple consistent with corporate fundamentals, once fiscal policy risk abates.


Our S&P 500 price targets are 1250 at year-end, 1450 in 6 months and 1575 at yearend 2013. Those estimates suggest returns of -14%, 0%, and +9% over those time periods. Our year-end 2012 forecast is below our estimate of fair value due to high uncertainty from the impending December 31 ‘fiscal cliff’.


Our baseline assumption is that fiscal issues will be resolved during 1Q 2013 but they remain the largest medium-term risk to US equity performance and economic growth. Our US Economists expect $193 billion of fiscal consolidation out of the potential $576 billion total, representing a drag of about 120 bp on 2013 GDP.


Although we forecast a rising stock market in 2013, numerous headwinds remain for equity performance that policy action must overcome: Consensus 2013 EPS estimates remain too high despite sales and EPS revisions that have been consistently negative in 2012; S&P 500 margins have declined for three quarters; US GDP growth continues to stagnate near 2%; China economic growth has been reduced ahead of an important political transition in November; and political and policy uncertainty remains high in Europe along with risk to Euro area growth. The major near-term policy risk relates to possible 1Q 2013 fiscal consolidation of roughly 4% of GDP under a worst case outcome.


Our S&P 500 EPS, revenue and ROE estimates remain largely unchanged as QE was already an element of our US GDP forecasts. We expect S&P 500 will earn $100 per share in 2012, $107 in 2013 and $114 in 2014, with revenue growth of approximately 5% in each year. Our ROE forecasts remain 17.5% for 2012 and 17.3% for 2013 for the S&P 500 due to weak Financials ROE but 19.7% and 20.7% on an ex-Financials basis.


Slow growth, low inflation and high unemployment justify additional easing. Goldman Sachs US Economics forecasts real US GDP growth of 2.2% in 2012 and 1.9% in 2013. They forecast benign core PCE inflation below 2% and expect the US unemployment rate will remain above 8%. Our forecasts are modestly more conservative than the FOMC central tendency outlook as well as consensus expectations. We assume GDP growth of 2.5% in 2014 as an input in our top-down sales, margin, and EPS.


We revise our 2013 S&P 500 earnings estimate to $107 (from $106) and introduce a 2014 EPS forecast of $114 per share. Our new estimates imply EPS growth of 4% in 2012, 7% in 2013, and 6% in 2014. Our EPS estimates are below current bottom-up consensus EPS estimates in 2012, 2013 and 2014 of $102, $115 and $128, respectively (see Exhibit 1).


Our regression-based model of sales and net margins for each sector drives our earnings forecasts for individual sectors and for the overall S&P 500. Variables included in our sales and margin models encompass US GDP growth, world GDP growth, 2-year and 10- year US Treasury rates, Brent crude oil, core inflation, and the tradeweighted US Dollar (see Appendix A for our macroeconomic assumptions).


The level of sales is highly correlated with nominal economic growth. We assume the nominal size of the US economy will grow by 3.7% in 2013 and by 4.6% in 2014. Given more than 30% of aggregate revenues of S&P 500 companies take place outside of the US, our model forecasts S&P 500 sales will rise by 4.4% in 2013 and 4.7% in 2014, respectively.


Our revenue growth forecast is in-line with consensus expectations. We forecast trailing four quarter net margins will return to the previous peak of 8.9% by 2013 before rising to a new peak of 9.0% in 2014. Higher labor costs and decelerating margin expansion in the Information Technology sector are headwinds to further margin expansion at the index-level (see Exhibit 4). Consensus expects aggressive margin expansion of 60bp in both 2013 and 2014. Bottom-up consensus forecasts S&P 500 margins will reach new peak levels by 1Q 2013.

To summarize: Goldman rejoins the sellside groupthink. It will be wrong once again.

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Lost Wages's picture

When has the sell side been wrong in the last year? Stocks go up and then they go up. Ad infinitum. End of story.

LawsofPhysics's picture

Yes, now about that fiat you are giving me in exchange for my soybeans...

nope-1004's picture

uhhhhh...... my earlier 1250 target is beat, so I guess I'll make it fit somehow.  But how?  Oh... fiscal cliff, ya, that's it!



redpill's picture


How about they give us an S&P Forecast priced in gold.  Pricing it in dollars doesn't mean much.

Comay Mierda's picture

goldman looking for more muppets. everything is going up. except the dollar and bonds.  SPX will not plunge priced in dollars. only priced in gold

Muppet of the Universe's picture

I'm sorry this is so innapropriate and offtopic, but I saw a chart, and I hoped this would be a place I could find traders.

CrashisOptimistic's picture

"especially not if the Fiscal Cliff compromise is one that does take away more than 1% of GDP thus offsetting all the "benefit" from QE."

Tyler, you may not be up to date on this.  Pelosi and Reid have both said they will NOT defend the Soc Sec Payroll Tax Cut.  It's gone.  Before the negotiations even begin, they have let it go.

It's $120 billion or 0.6% of GDP.  Before negotiations have even begun there will be a 0.6% reduction in GDP next year.

HelluvaEngineer's picture

Right.  Just a healthy 10% "correction", then we throw the switch the other way.  As long as no one goes to jail, this nonsense will continue.

Lost Wages's picture

All I know is if I had been a good little sheeple and listened to Warren Buffet, I would have been making money ALL YEAR LONG. Instead, Zerohedge and Charles Biderman "made more sense" to me, so I'm still broke as fuck. I'm not interested in the truth anymore. I'm only interested in making money. I don't care how fake the market is. I want the fucking cash. Tell me what to buy or fuck off. :)

Dr. Engali's picture

This should help you feel better......check this out then decide who you should listen too.;range=...

Lost Wages's picture

Can you believe my father had an opportunity to buy shares in Berkshire Hathaway at $5000 back in the day? Passed it up. Probably didn't have the money at the time.

earnyermoney's picture

Warren and other's of his ilk are barking at their carnival booths. They need some suckers in order to realize their gains.

Lost Wages's picture

I know. The only reason they haven't crashed the market yet is because retail like me hasn't fallen for the bait. So as long as we don't, S&P has up days forever.

LMAOLORI's picture





Bailed out Warren Buffoon is an insider who hides his tax exempt wealth in the gates foundation and yet he was given a presidential medal 

Buffet's Will Says - The foundation must continue to satisfy the legal requirements qualifying Warren’s gift as charitable, exempt from gift or other taxes. 

In other words, the President’s "Buffett Rule" would not tax the vast majority of Buffett’s own sheltered income, including either his unrealized capital gains, which are currently taxed at 0%, or charitable contributions, which are tax deductible.

What a scam calling for higher taxes on the rest of us his kids will manage and make money from all this tax exempt money forever he has set up charitable organizations with billions in them for each of them to run that pay them$90 Million a year besides his hiding wealth in gate's foundation.

kalasend's picture

LMAO with a bittery tear in eye. Totally feel you.

ZH makes sense and others make fiat. Then last I checked, grocery stores still take fiats. 

seataka's picture

He said precisely what he needed to say to hypnotize his listeners into hanging in there when the crash comes.. -

Lost Wages's picture

Apparently Bullshit has totalitarian rule over the entire globe and has become the new reality.

Stoploss's picture

Personally, being the sole trustee and administrator of my own retirement account, I don't give 2 shits which way the "market" goes.

So take it down 20%, and start with gold first..  :)

francis_sawyer's picture

1474 then bust...


or, if you prefer to gamble with the ALMOST equally corrupt prognostications on NFL & NCAA Football, francis_sawyer shamelessly links his 'picks' blog...

(sorry folks ~ junk away)

nope-1004's picture

I will NEVER junk another male whose first name is Francis.  That's torture enough  ;-)



francis_sawyer's picture

my 'friends' call me PSYCHO... If you call me 'francis'... I'll KILL you... & one more thing... I don't like anyone touching me... So any of you... homos... touch me... & I'll kill you...

francis_sawyer's picture

Thanks Sgt. Hulka!... (our newest bestest buddy & BIG TOE)...

oddball's picture

<a href="">Well OK hotshot</a>

LMAOLORI's picture




Is the Fix in?

Do stocks signal an Obama victory?

A rising market in the months before Election Day is a good sign for the incumbent party. By one read, stocks would need to drop 5% by Oct. 31 for Romney to win.

Stocks gain on jobs data

(doesn't even matter if it's phony data) looks like the non (lol) political Fed has a hand in this

Fed Signals Move Toward Thresholds for Keeping Stimulus

DoChenRollingBearing's picture

OK, + 1 for you, psycho!

Thanks for letting us know not to call you Francis...

SheepleLOVEcheddarbaybiscuits's picture

invert 2013 and that chart should be correct....

drivenZ's picture

since when has any of goldman's released research been right about anything? 

Element's picture

What Tyler said. New year fizz.

Dr. Engali's picture

When the chaos starts this thing is not going to recover.We are working our way down to S&P 400.

By the way we could use a little chaos around here's been boring.

RSBriggs's picture

I've been trading for nearly 30 years now. and I can't quantify what I'm sensing, but things just feel wrong somehow today.  I look at the quotes and the heatmaps, and get this odd feeling of deja-vu.   There's a black swan somewhere that just took flight - some "change in the matrix", I just can't put my finger on it....

fonzannoon's picture

Everyone is calling bullshit on everyone else. It's basically acknowledged that everything you see and hear is a lie. The sheep arebeing hit with a caddle prod today just to see how much they can be shocked. Maybe it's just for fun...

RSBriggs's picture

There's something especially wrong today - I just can't put my finger on it.  It's like there is this loud alarm bell going off in my head every time I look at my quote screen screaming "WARNING Will Robinson, DANGER!" at me, and I can't see what is setting it off...

lolmao500's picture

From ZH twitter :


Turkish link about it...

The goddamn FSA is making sure war breaks out...

Jason T's picture

Farmland?  Nice shooting Tex.

lolmao500's picture

Another Syrian shell has just exploded in Turkey, this time in Hatay province countryside. Turkish artillery is reportedly firing back.

earnyermoney's picture

Let's see, Syria admits to the first shell and aplolgizes to Turkey. Then we get a couple of days or response from Turkey for domestic consumption. We're to believe Syria insanely lobs another shell into Trukey? LOL. Hillabarry needs a pretext to bomb Syria via Turkey. Need a war to discuss at the next debate. Barry's gotta look tough.

Element's picture

Just remember, Barry is the nominated 'peace-prize-guy', so that can backfire.

Everybodys All American's picture

Sequestration should add more jobs by the time the spin of Obama's administration is done today.

Dr. Engali's picture

Does oil know what the hell it's doing?

Lost Wages's picture

Shouldn't it say, "Despite Many Fleeing, Stock Market Gains"? How does that work, anyway?

lolmao500's picture


Article 5 of NATO is coming... SHIT!

Element's picture

Turkey and NATO better remember, Russia is just across the Black Sea and quite capable of giving Turkey a good kicking, and turning off NATO's gas.

They better get a sense of perspective on this real fast.

yrbmegr's picture

The world is drowning in gas.  China is just on the other side of Russia from Turkey.  Russia's got nothin.

Element's picture

Dude, gas in other parts of the world, is not equal to gas in European distribution systems. If Europe were able to economically afford to import that gas via ship from across the globe they would not be using a Russian supplier, while also asking the Russians to drop the price to a more affordable level, for broke-ass Europe.

Or did you forget that bit of the picture?

And you better look at an actual 3D globe or Atlas because Europe/Turkey verses China are almost on the other side of the planet from each other.

Russia has plenty of clout and can use it, and only a complete fool would pretend this is not so. Russia has repeatedly warned the US and NATO about what they are doing in Syria.  They have done this more times than I can remember during the past year, and they have even gone so far as to suggest, on more than one occasion, that nuclear weapons could be involved in such a scenario, if the West did anything to escalate the situation there.

How much more clearly does this have to be stated for the delusional idiots in NATO to get the message?

DoChenRollingBearing's picture

Tyler Durden!

Many of us here at Zero Hedge would really like to see some systematic analysis of how Goldman's various predictions have worked out, particularly within any time frame they specify.  I see all the time that Goldman's analyst Mr. or Ms. XXX says this, and sometimes I see ZH follow-ups, but it would be really nice to have one of your Aces track Goldman's picks and/or conflicts of interest...