Goldman: Entire S&P Move Higher Is Due To Multiple Expansion; Shiller P/E Says 30% Overvalued So... Buy

Tyler Durden's picture

While it has been a stretch to call Bernanke's post-2009 experiment in "wealth-effect" central planning (where in 2013 the Russell 2000 has outperformed the composite hedge fund by a factor of over 500%!) a "market", here are some of the latest market thoughts by Goldman's David Kostin.

US stocks surged to an all-time high of 1745 following the debt accord. The S&P 500 has returned 22% YTD driven almost entirely by P/E multiple expansion rather than higher earnings.

In other words, there has been zero actual bottom line improvement in 2013. Zilch. Nada. All this despite so many loud promises by every pundit in late 2012 that 2013 will be the year of the turn, just wait, you'll see. It also means there has been zero "fundamental" component to the upside. All of it is multiple expansion. What's another name for that? Why, "the Fed."

Bearishly inclined investors will point to the cyclically-adjusted P/E ratio popularized by newly-crowned Nobel laureate Robert Shiller that suggests the S&P 500 is roughly 30% overvalued based on 10-year trailing average reported EPS.

"30% overvalued" by a person who just won the Nobel prize for saying the market is irrational and creates bubbles? You don't say. Why is a perfect segue into the final Goldman notice:

We forecast the index will climb to 1750 by year-end 2013, a slim advance less than 1% above today’s level. Our year-end 2014 price target remains 1900 or 9% above the current level. S&P 500 trades at 2.6x price/book value. From a valuation perspective, the index level is consistent with the market’s current return on equity (ROE) of 15.5%, and in-line with the 35-year average P/B.

To summarize Goldman:

  • All upside is multiple expansion-driven, i.e. relentless Fed pumping of risks as the final bubble grows to unprecedented proportions,
  • A market which even tenured economists say is a disaster waiting to happen.
  • But hey, the music is still playing so everyone must dance all the way until Goldman's 2100 target... in 2015.

All of this has come and gone before, but since this time will be different, one can just ignore the recurring past.

And, finally, some charts:

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Future Tense's picture

Happy 26 year anniversary of the October 1987 crash. Another one is most certainly due based on the use of high frequency trading in the markets, current overvaluation and euphoric sentiment:

aint no fortunate son's picture

Is "David Kostin" a synonym for Thomas Stolper?

Millivanilli's picture

Goldman distributes these comments because they think the little guy needs access to a level playing field... Cough.

DaddyO's picture

Didn't we just see an article on the theater of the absurd?

Is this article meant to further drive home the point that we're really screwed?


NoDebt's picture

Just this article gives you that impression?

Stuck on Zero's picture

Ignore all this bearish talk.  Buy Google.  It's going to $10,000 next.


Haager's picture

Do I understand it correctly that SPX will drop to 1720 on this note, before rushing through the 1750 early this week?

highly debtful's picture
Ah yes, the blessings of quantitative easing and treasury bonds in abundance... You might have heard of the recent auction of a Ferrari 250 GTO, one of only 36 manufactured, which was acquired by an unidentified buyer for a cool 52 million dollars. Now imagine for a moment that a barn find turns up because a retired Dutchman decides to buy an abandoned French farm and renovate the place. When he pulls out a rusty, but completely original car from under a mouldy tarpaulin, it turns out to be a GTO. Number 37. Two weeks later an old lady in the Midwest dies and among her meager belongings is a dusty old sportscar in a garage that has been locked for over 35 years. That's 38. Three months after that, the Associazione Cavallino Rampante in Modena, Italy stumbles upon the automotive find of the century: in a long forgotten underground storage room of a renowned Ferrari dealership 10 cars are discovered, neatly aligned, factory new, each with a mere 15 kilometers on the odometer and a personalised, handwritten letter of recommandation from il commendatore himself to the former dealer, who was a close friend of his. In short, GTO's are suddenly popping up all over the place. How do you think the guy who bought his for 52 million dollars will feel? Now picture the People's Republic of China... 
Bam_Man's picture

Now picture the People's Republic of China... 

At least the Ferrari buyer has a beautiful car to look at and maybe take to a car show once in a while to show off. That would make the fact that he grossly overpaid a little easier to swallow.

The Chinese have some numbers on a hard-drive/computer screen. I've been saying all along that they cannot possibly be happy about the $85 billion a month in QE.

NoDebt's picture

They are based on production records.  The question is how many are still in existence.  All 36?  Usually on such limited production vehicles there are experts who know the numbers, how many were wrecked or destroyed over the years, and usually who owns each one (although some people go to great pains to hide their ownership).  

highly debtful's picture

You are, of course, absolutely right. But I was simply using a metaphor to make a point.  

therover's picture

"The question is how many are still in existence. "

Similar to the question, how much physical gold and silver is in existence. China is taking our mass produced, fake fiat and turning into physical gold...which is real...just like that Ferarri. 


Long term investors that want to preserve purchasing power are doing the same thing...turning mass produced fake fiat into physical precious metals. When that philosophy starts to hit mainstream, that is when the fun starts. 



GaryNeville's picture

This market doesn't even have the gumption to pull back properly anymore! Its just up up up up - pull back 0.5% - BTFD - up up up up - pull back 0.4% - BTFD - up up up up up up


Tough life being a bear I can tell you!

Professorlocknload's picture

Might be the S&P hasn't really gone anywhere, in reality. Let alone 30% over valued in a 40% devalued currency.

Running On Bingo Fuel's picture

(crowd chants)

Her head pops up from underneath the new Fed Chairwomans desk.

FieldingMellish's picture

I love the fact that everyone considers it a binary market. Its either stocks or bonds, completely ignoring the fact that both have risen since 1980 and both may, indeed, fall together.

Running On Bingo Fuel's picture

That's why some have what are called 'all in' triggers in the metal markets. We believe in mass exodus.

Dollar Bill Hiccup's picture

It never gets old, that's the beauty of the "con" in E-con-omics ...

LooseLee's picture

Multiple Expansion = Greater Fool Theory in Action

moneybots's picture

"Multiple Expansion = Greater Fool Theory in Action."


That may be, but where is the top?  800, 900, 1000,1100, 1200, 1300, 1400, 1500, 1600, 1700 and counting.

LooseLee's picture

Well, it can only be when the very last 'fool' is "ALL-IN"......probably still higher than most believe.

disabledvet's picture

first off this an outstanding video although music isn't loud enough...or at least loud enough for a market heading straight to Planet Mars:

Catullus's picture

Bullish till everyone else isn't.

Someone's got to know there's no where for this money printing to go. Like that just has to be the conclusion

moneybots's picture

"All of this has come and gone before, but since this time will be different, one can just ignore the recurring past."


I was just reading that the Venezuelan market was up 312% for the year.  Easy Jan is supposed to become the next money pumper.  Goldman's target of 1900 for 2015 may be too low, for all anyone knows.

It is never different this time, but when is it going to be never different?  The Nasdaq jumped 85% in 1999, before it was all over. 

Stocks are over valued, so buy, might be the right thing to do for the time being.  Denninger at one time was short at 850.  Gee, now we are at 1750.  Where is the top?  When is the top?  All the talk about how the Fed HAD to taper and now that talk is all so much hot air, with Yellen on deck. 

"We forecast the index will climb to 1750 by year-end 2013, a slim advance less than 1% above today’s level."  The Russel 2K is up 31% for the year, so far.  The Nasdaq, which rapidly ramped up from the Oct. 9 low, gapped higher on Friday.  Off to the races, or what?

reader2010's picture

the dogma of the Dark Age 2.0 has always been "BTFD."  This time . is different? 

devo's picture

musical chairs

MrButtoMcFarty's picture

Went long Wed....intend to stay long until Jan 20....then back into the hole to see what happens....

TaperProof's picture

Like how goldman said gold is a slam dunk sell if the debt ceiling is raised?   I trust not a word out of their mouths ever.

slaughterer's picture

1750 is a good point to short.  We already started to short for the first time in a week today.