• Steve H. Hanke
    05/04/2016 - 08:00
    Authored by Steve H. Hanke of The Johns Hopkins University. Follow him on Twitter @Steve_Hanke. A few weeks ago, the Monetary Authority of Singapore (MAS) sprang a surprise. It announced that a...

Goldman Downgrades US Equities To "Underweight", Sees Risk Of 10% Drawdown

Tyler Durden's picture


It was inevitable that virtually at the same time as Goldman said the S&P is overvalued "by almost every metric" that the firm would go ahead and slam US equities in only its first tactically bearish call on US stocks in over a year.

Recall from Friday night:

S&P 500 valuation is lofty by almost any measure, both for the aggregate market (15.9x) as well as the median stock (16.8x). We believe S&P 500 trades close to fair value and the forward path will depend on profit growth rather than P/E expansion. However, many clients argue that the P/E multiple will continue to rise in 2014 with 17x or 18x often cited, with some investors arguing for 20x. We explore valuation using various approaches. We conclude that further P/E expansion will be difficult to achieve. Of course, it is possible. It is just not probable based on history.


The current valuation of the S&P 500 is lofty by almost any measure, both for the aggregate market as well as the median stock: (1) The P/E ratio; (2) the current P/E expansion cycle; (3) EV/Sales; (4) EV/EBITDA; (5) Free Cash Flow yield; (6) Price/Book as well as the ROE and P/B relationship; and compared with the levels of (6) inflation; (7) nominal 10-year Treasury yields; and (8) real interest rates. Furthermore, the cyclically-adjusted P/E ratio suggests the S&P 500 is currently 30% overvalued in terms of (9) Operating EPS and (10) about 45% overvalued using As Reported earnings.

Sure enough, here comes Goldman's global portfolio strategy research team headed by Nielsen, Oppenheimer, Kostin, Garzarelli, and Himmelberg, and pulls another leg out of the Fed-driven rally.

We downgrade the US equity market to underweight relative to other equity markets over 3 months following strong performance. Our broader asset allocation is unchanged and so are almost all our forecasts. Since our last GOAL report, we have rolled our oil forecast forward in time to lower levels along our longstanding profile of declining prices. We have also lowered the near-term forecast for equities in Asia ex-Japan slightly. Near-term risks have declined as the US fiscal and monetary outlook has become clearer.



Our allocation is still unchanged. We remain overweight equities over both 3 and 12 months and balance this with an underweight in cash over 3 months and an underweight in commodities and government bonds over 12 months. The longer-term outlook for equities remains strong in our view. We expect good performance over the next few years as economic growth improves, driving strong earnings growth and a decline in risk premia. We expect earnings growth to take over from multiple expansion as a driver of returns, and the decline in risk premia to largely be offset by a rise in underlying government bond yields.


Over 3 months our conviction in equities is now much lower as the run-up in prices leaves less room for unexpected events. Still, we remain overweight, as near-term risks have also declined and as we are in the middle of the period in which we expect growth in the US and Europe to shift higher.


Regionally, we downgrade the US to underweight over 3 months bringing it in line with our 12-month underweight. After last year’s strong performance the US market’s high valuations and margins leaves it with less room for performance than other markets, in our view. Our US strategists have also noted the risk of a 10% drawdown in 2014 following a large and low volatility rally in 2013 that may create a more attractive entry point later this year.

Of course, how the above trade fits with Goldman's top trade #1 for 2014 revealed in November, which was to go long the S&P funded by an AUD short, one can only wonder.

And now the muppets start to wonder: should we do what Goldman is telling us to do, and blow up as always, or do what Goldman's trading desk is doing, which probably is buying risk from all those who are selling. Ah, questions.

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Mon, 01/13/2014 - 08:54 | 4326801 Harlequin001
Harlequin001's picture

Not really 'pumping and dumping' are they? Much.

Where's the fucking police...

Mon, 01/13/2014 - 08:55 | 4326807 Occident Mortal
Occident Mortal's picture

Pump and Dump, talking their book, etc, etc.

Mon, 01/13/2014 - 09:00 | 4326812 GetZeeGold
GetZeeGold's picture



Did one of the printers breakdown or something? I'm seeing DOW 30K here.......and gold right around zero.


I bought a bitcoin so if I get lost I can phone the NSA to see where I am.

Mon, 01/13/2014 - 09:31 | 4326863 Headbanger
Headbanger's picture

Wi Tu Hi !

Mon, 01/13/2014 - 09:38 | 4326881 aint no fortuna...
aint no fortunate son's picture

If the flow desk says down 10% that means the prop desk is BUYING - what side of the trade do YOU want to be on?

Mon, 01/13/2014 - 09:47 | 4326898 Headbanger
Headbanger's picture

I think GS is giving fair warning cause they know they can't keep pumping up the markets with the taper and rates rising fast.

As I've said here several times before, the political impetus is gone for this five year scam now that Obozo has lost all his political power!

The big banks are now covering their big asses for the Obozon downfall.

Mon, 01/13/2014 - 12:57 | 4327461 flacon
flacon's picture

The ultimate deceit for Goldman Sachs would be to tell an occasional truth every once in a while. 

Mon, 01/13/2014 - 14:09 | 4327720 GotNuttin'todo
GotNuttin'todo's picture

The best training for all of us Pavlonian sheeple is to reward us, but only once in a while, and at completely random intervals, with a correct market call. Did I hear a bell ring?

Mon, 01/13/2014 - 09:22 | 4326856 Max Damage
Max Damage's picture

On the same day they uppgrade Twatter from $46 to $65 on utter bullshit. Yup, where are the police

Mon, 01/13/2014 - 09:38 | 4326882 Harlequin001
Harlequin001's picture

I didn't notice that, but then if it wasn't mentioned here on ZH I wouldn't hear anything they say.

Bottom line is that I just don't listen to them...

Mon, 01/13/2014 - 08:53 | 4326803 new game
new game's picture

turbulence at 30,000, take er down to 26000...

Mon, 01/13/2014 - 08:59 | 4326814 tarsubil
tarsubil's picture

Whatever number sounds good, go with it.

Mon, 01/13/2014 - 08:54 | 4326805 Sudden Debt
Sudden Debt's picture

untill they start QE³ and the market rocks 20% to the upside boosted by bullshit.

I'm not shorting anything.

Mon, 01/13/2014 - 08:57 | 4326809 JustObserving
JustObserving's picture
Goldman Sachs Raises Target on Twitter from $46 to $65, Maintains Buy
Mon, 01/13/2014 - 09:09 | 4326815 buzzsaw99
buzzsaw99's picture

excellent! /mr. burns

Mon, 01/13/2014 - 11:03 | 4327064 Sudden Debt
Sudden Debt's picture

If twitter charges 1$ per "TWIT" they might even have a year without a loss!


Mon, 01/13/2014 - 08:57 | 4326810 buzzsaw99
buzzsaw99's picture


Mon, 01/13/2014 - 09:03 | 4326816 BigSimes
BigSimes's picture

The signal from the noise subtext is simple: We (GS) don't know what's going on.

So, when the parasitic squid doesn't know what to do, exit in an orderely fashion please...

... Into undervalued Gold Miners!

Mon, 01/13/2014 - 09:04 | 4326817 AccreditedEYE
AccreditedEYE's picture

My guess is this piece is another attempt to suck retail into shorts so their HF customers can rape them senseless again. Don't get fooled! They have no vested interest in telling the truth without making a profit. The elder days of being respected for correct or incorrect calls are long gone.

Mon, 01/13/2014 - 09:08 | 4326821 GetZeeGold
GetZeeGold's picture



Never short a bubble........ever.

Mon, 01/13/2014 - 09:11 | 4326826 BandGap
BandGap's picture

I dunno. Looks like everyting GS is putting out these days is to kickstart the shitstorm. It is troubling. Nah.

Mon, 01/13/2014 - 09:35 | 4326876 firstdivision
firstdivision's picture

That's cause the profit margin on a six-sigma event is staggering.  Instead of a few million a day, the increased vol can make it high 10's of millions made a day, and thats without leverage.

Mon, 01/13/2014 - 09:06 | 4326818 ziggy59
ziggy59's picture

Sure.. Wasnt overpriced b4 Christmas... Oh thats right..bonuses..

Now that the crooks have robbed the public again, its time to go to St Barts..

Mon, 01/13/2014 - 09:07 | 4326820 101 years and c...
101 years and counting's picture

if this doesnt guarantee SPX 2K, I dont know what does.

Mon, 01/13/2014 - 09:08 | 4326822 dobermangang
dobermangang's picture

I've always found that doing the opposite of what GS says in public has been better financially in the short run.

Mon, 01/13/2014 - 09:13 | 4326833 yrbmegr
yrbmegr's picture

GS:  Sell us all your stocks cheap.

Mon, 01/13/2014 - 09:23 | 4326835 Quinvarius
Quinvarius's picture

They have unlimited access to money and credit.  They can put the S&P wherever they want until they get a phone call from the Treasury telling them to stop.

Mon, 01/13/2014 - 09:09 | 4326823 MFLTucson
MFLTucson's picture

Yes of course, bonus time is over so the house of trash says get out so they can buy back in at a lower price.  Disgusting bastrds!

Mon, 01/13/2014 - 09:11 | 4326828 Quinvarius
Quinvarius's picture

So we get to see their famous market crashing algo again.  Basicly it consists of selling huge in thin markets to run through fake support levels which they themselves sculpted.  And since it is just paper, there is no end to the carnage they can cause.

Mon, 01/13/2014 - 09:13 | 4326831 BandGap
BandGap's picture

Exactly. The extent of the carnage depends on how many lemmings follow.

Mon, 01/13/2014 - 09:21 | 4326847 Quinvarius
Quinvarius's picture

If it doesn't selloff, they will sell paper harder until they get what they want.  I saw what they did in paper gold, despite the physical delivery.  The world of paper stocks is a completely imaginary world.  There is no reality to what you see in your brokerage account.  It is all digital promises.

Mon, 01/13/2014 - 09:16 | 4326838 fountainhead
fountainhead's picture

Wonder if this goes as well as their buy china sell gold call in december?

Mon, 01/13/2014 - 10:55 | 4327039 Woodhippie
Woodhippie's picture

Since China is acquiring all the gold, buying China means buying gold, does it not?

Mon, 01/13/2014 - 09:17 | 4326843 Iocosus
Iocosus's picture

Muppets, let the Stolpering begin!

(Go long, idiots)

Mon, 01/13/2014 - 09:18 | 4326845 The man with po...
The man with pointy horns's picture

So 10% increase in these next three months, got it.

Mon, 01/13/2014 - 09:29 | 4326862 kenezen
kenezen's picture

In my blog in August of last year I said the market in the first quarter of 2014 will recede dramatically, It's nice to see Goldman agree. It's not however, that it's just overweight. That alone would not make me bullish or bearish because I look mostly for any volatility because Volatility is the necessary and one major ingredient to profit!

No! It's the differential between Production and Consumption. In August of last year when the S&P was at approximately 1700 I said we are just about to turn from inadequate production for the global consumption of goods. There has to be at that point a leveling process and then inexorably a turning and neutralization of growth or reduction in purchasing price and sale volatility of goods slowing production. I was shocked that the thin trading at the end of the year drove it above 1800. It is a testament to the offshore markets. I predicted that the market at some point this quarter will recede dramatically. Goldman while being somewhat more conservative seems leaning that way as well!

I do admit happily that the market appears stronger but, that may be misdirection kind of like 2008. If global Consumption slows this process would be inevitable.

Mon, 01/13/2014 - 10:06 | 4326925 notadouche
notadouche's picture

Question:  10% ago why weren't they touting the market as fairly valued?

Mon, 01/13/2014 - 10:15 | 4326946 shermacman
shermacman's picture

Get in line, muppets! GS is buying so sell those equities! 
Wait, what? 

Mon, 01/13/2014 - 10:36 | 4326995 Hedgetard55
Hedgetard55's picture

"The longer-term outlook for equities remains strong in our view. We expect good performance over the next few years as economic growth improves, driving strong earnings growth and a decline in risk premia. We expect earnings growth to take over from multiple expansion as a driver of returns, and the decline in risk premia to largely be offset by a rise in underlying government bond yields."


     This is a keeper for sure. Revisit in 3 years. And these douchebags are the smartest guys in the room?

Mon, 01/13/2014 - 10:37 | 4327001 Hindenburg...Oh Man
Hindenburg...Oh Man's picture

man, that .20 percent dip had the fuck bought out of it at the open. whew...almost a crash there! 

Mon, 01/13/2014 - 10:51 | 4327032 Racer
Racer's picture

The Fed to Goddam Suckers.... we are scared sh!tless of this new bubble ... talk it down asap, then we will give you even more money to buy stawks when they are 'cheap'

Mon, 01/13/2014 - 11:26 | 4327113 zaphod42
zaphod42's picture

Just a thought, mind you. 

Goldman is spinning the coming depression in an effort to limit the downside to the market collapse. They only hope it will be a mere 10%!  The reality will be much worse.

Just a thought, mind you.


Mon, 01/13/2014 - 13:07 | 4327514 GotNuttin'todo
GotNuttin'todo's picture

Some of us ZHers, with nuttin else to do, blogged about this on the weekend. 10%...big deal....where's the beef?

Mon, 01/13/2014 - 13:59 | 4327692 Papasmurf
Papasmurf's picture

Back up the truck!

Do NOT follow this link or you will be banned from the site!