Goldman Defends Its "Stocks Are Overvalued" Call From Angry Clients

Tyler Durden's picture

Ten days ago, the few carbon-based habitual gamblers left in the market stopped and read Goldman's report which, as we said, may have 'just killed the music' with its slam of the market saying the "S&P500 is now overvalued by almost any measure." Recall: "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." Since then, many of Goldman's client must have been displeased that David Kostin refuses to drink from the punchbowl anymore, and sent in their complaints. However, Goldman has refused to budge and issued a follow up defense to its thesis that stocks are overvalued more than at any other time except the tech bubble with "Valuation fact vs. fiction part 2: Responding to common questions about S&P 500 valuation."

From Goldman:

We received a barrage of questions following the publication of last week's Kickstart commentary about the valuation of the US equity market. Last week we argued that the S&P 500 currently trades towards the higher end of a fair value range based on a variety of metrics, and noted in particular that the P/E multiple has rarely been higher than it is now, outside of the Tech bubble.

With the market close to fair value, we believe the forward path of US equities will depend on the trajectory of profits rather than further expansion of the valuation. We forecast S&P 500 EPS will grow at a 7% annualized pace through 2016, driving the S&P 500 to 2100 by the end of 2015 and 2200 by the end of 2016: a gain of 20% over the next three years.

Most client responses attempted to justify personal expectations for continued multiple expansion in 2014. This supports our observation that many on the buy-side expect price gains of 10% to 20% this year, well above the 3% upside to our target of 1900 for year-end 2014. Below we continue the conversation and respond to the most common questions.

1. Many investors asked how our conclusions would change if we used a longer historical valuation series than forward P/E, which starts in 1976. Exhibits 1 and 2 show a historical series of trailing P/E multiples since 1921 and the distribution of these multiples.

The 90-year timeseries of trailing P/E multiples shows a similar picture to the 40-year forward P/E multiple timeseries. At 18x, S&P 500 still trades above average valuation, ranking in the 75th percentile historically. While this is modestly lower than the 83rd percentile ranking of 16x forward P/E, the fact remains that market has rarely traded at a higher P/E outside of the Tech bubble, or coming out of recessions when EPS were extremely low.

2. The low interest rate backdrop was the most common client justification for continued P/E expansion. Exhibit 3 shows average P/E multiples in different nominal and real interest rate environments. Current S&P 500 P/E is either at or above the historical example regardless of the metric used. In addition, the Fed Model suggests S&P 500 upside roughly in line with our 1900 target given the current gap between equity and bond yields. For more on the Fed model, see our US Kickstart from Dec. 6, 2013.

Some clients pointed out that stronger US GDP growth and Fed taper should lead to higher yields, which have implied higher P/E historically. While this view is in line with our 2014 economic and interest rate outlooks, S&P 500 P/E already exceeds the historical average when nominal yields fall between 3-4%. While yields between 4%-6% would imply a modest 1 P/E point increase, we don’t expect rates will reach that level in 2014. More importantly, averages in that bucket are largely biased by the Tech bubble.

It is important to note that long-term histories of the market have inherent limitations. First, because 5% of S&P 500 constituents turn over each year on average, fewer than 20% of current S&P 500 constituents were members of the index 40 years ago. Index composition was also different at a sector level: Energy was 25% of the market in 1980 and traded at a low multiple of 6x, while in 1990 Consumer Staples was ascendant and accounted for 15% of the market at a premium multiple (at the time) of 13x.

3. We also received questions about specific sectors or stocks that may be biasing aggregate S&P 500 valuation. As we have highlighted recently, however, the distribution of S&P 500 P/E multiples is currently historically tight. Even the most expensive sector in the market, Consumer Staples, only trades at a single P/E point premium to the broad market.

4. The most cautious question from clients related to the relationship between rising valuation and margins, which are near record levels. We have not found any reliable historical relationship between S&P 500 margins and P/E multiples. Margins have hovered near their peak of 8.9% for over three years, where we expect them to stay in 2014. However, as the labor market recovers and inflation eventually rises, risks are to margin downside. That said, consensus expects margins will expand to a new high of 9.5%. Flat P/E and margins means sales growth will be the key driver of returns.

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AccreditedEYE's picture

Hedge Fund clients getting desperate... "need moar Muppet shorts in this market! Can't achieve break out velocity without em"   Squid replies: "We'll tell everyone we're DOUBLER sure of over valuation now. Don't worry it always works. wink, wink" And here it is....

AlaricBalth's picture

"Some clients pointed out that stronger US GDP growth and Fed taper should lead to higher yields, which have implied higher P/E historically..."

Uh, What???

Robert Shiller's plot of the S&P composite real price–earnings ratio and interest rates (1871–2012), from Irrational Exuberance

TeamDepends's picture

Questions or concerns?  Dial 1 800 FUK MUPT.

eclectic syncretist's picture

Those fucking bastards at Goldman are paid by their muppets to lie to them, not to publish this truthful shit.  WTF???!!!

frankTHE COIN's picture

The inmates now want to run the Asylum.

teolawki's picture

How do you tell who is who?

Mr Pink's picture

Wait....are you trying to tell me my stocks aren't going up 30% this year?


AccreditedEYE's picture

No. They are telling you that they are, but they're doing so in their own special way.

waterwitch's picture

Bernanke you, Goldman.

Fixed it for you.

Bearwagon's picture

Well, clearly the normal fivefold inverse psycholgy regularly to be attached to any goldsack statement will not work in this case. An event that hasn't happened for ... like ... five or more years ...


Anyone see a mass muppet exodus?  Timeline?

atomp's picture

I do. Immediately following the next crash.

Mr Pink's picture

Anyone listen to Coast to Coast last night?

Harry Dent was on in the first hour and was preaching deflation and had some bold predictions

Starting in 2014 stock market collapse - Dow 5000

Gold $700

Silver $5

He didn't have much to back this up...any thoughts ?

Colonel Klink's picture

Not buying it.  I think someone got to his hairy dent.  Someone probably back Fed him what to say.

yogibear's picture

Dow 40,000, Nasdaq 20,000 by 2009; Harry Dent predicts a 'New Millionaire Economy'


By Paul B. Farrell, Last Update: 9:25 PM ET Nov. 2, 2004

Does that answer your question?

Headbanger's picture

Yeah Pink.. What he say about the price of ammo?? 

Anybody got some good reloading gear for sale??

How about a nice pre-war P38 for $300?? 

TeamDepends's picture

Check out, The Doc is now selling what could be the most precious metal of all.

Headbanger's picture

You mean lead, copper and brass that make ammo all by themselves!!??


ebworthen's picture

I listened to that too.

I was not impressed with his take on Precious Metals; he was arguing that the markets are going to crash because of FED money printing but then saying that Gold and Silver were the "old way of thinking" and that they won't be valuable anymore the way they were in the past (the "barbaric relic" argument).

He was saying whiskey and shotgun shells were going to be more valuable.  Um...okay...but PM's won't be?

He was saying that Bitcoin was a fad too, but again PM's weren't going to be of value.

Did not compute for me.


EB    It's time to call bullshit on this PM's won't be worth anything noise. Central banks seem to think gold is still the shizzz, China sure likes it. Indian and Chinese population can't get enough of it so WTF?

TheReplacement's picture

If it boils down to whiskey and shotgun shells then stocks and bitcoins won't even be a thought.  Metals, long term store that would be useful once society has stabalized.


PINK   Dent is a mouthpiece for you know who. TPTB is trying their best to keep Amerikans away from gold and silver ownership, also they want to scare some sheep into selling PM's (just shaking out the suckers). 

Mr Pink's picture

It seemed like he had prepared statements, then when callers asked him simple questions there was a lot of uh..uh..uh

He also said pms were going to tank and the dollar will strengthen, but then said have canned food, guns, ammo and SILVER coins.

I really loved the part when he said he would literally eat his hat on air if China doesn't collapse within 2 years

firstdivision's picture

I'll give him a call and offer him $750/oz for his gold and $5.35/oz for his silver.

Save_America1st's picture

@Mr. Pink  re: Harry Dent prediction...

anything is possible in paper prices (700 and 5 respectively)...and as a stacker I would love that.  But we would need to be breaking down through a lot of space in order to get to those levels and so as a realist, I would also say good fucking luck finding any actual phyzz available if that scenario were to come through by even by 25% of that forecast.  Silver at 15/oz would end up commanding premiums close to 50%, and that's assuming anyone in their right mind would even sell anyways.

I guess some dealers would at first, but we already know it would only take a day or two for supplies to get wiped out and then the backlog of weeks and months would set in.  Our LCS guys aren't there to just give this stuff away!  They have a price-point to operate at, and they're not going to sell at a loss.  They won't be getting any deals from their wholesalers, that's for sure.

I guess at that point the Crimex would have to default and we would see phyzz prices slingshot away from the bullshit paper price.  I say keep stacking silver now at these prices while supply is readily available and premiums are still minimal.  Any big price slump (of paper) and you're still going to be paying a large chunk in premiums and availability will be extremely scarce. 

Why wait for that to happen just to still be paying around the same amount in fiat around mid-20's to possibly mid-30's per ounce?  For stackers, I still say the time is now to keep adding while you can get the phyzz now.  Makes no sense in waiting to try and get it at some bullshit paper price of 15 or's just not going to be all that feasible for most people and then supply will be gone or locked up until the rocket leaves the launch pad. 

Are you really going to be crying if you've bought now at 19+ today and have it in your hands and then in the next month or 2 it gets slammed down to 15 or lower but you can't get any?'re going to be glad you bought it when you had the chance. 

Yes, you still might get some phyzz with a hefty premium, but from where we are at right now the downside risk (from paper manipulation) is minimal compared to the massive upside potential after the Crimex defaults and the stampede begins for the real stuff. 

Be ahead of the sheeple herd now and load up...when they wake up and start stampeding and supply is gone, well you just might be able to cash in some sweet profits with a small part of your stash and pay off that fancy car or buy that nice plot of land you've been eye-balling for the last few years. ;-)

I'm looking to buy myself a sweet Semi Truck and a few trailors when the time and price is right.  Until then, I'm stackin' my phyzz as much as I can right now.

Ag, Bitchez!!!  That's just my 2 ounces worth ;-)


Its Only Rock N Roll's picture

It seems Goldman is preparing its defense for the next round of Congressional hearings into the market collapse and who is to blame. 

Rainman's picture

It's called the " We warned you " defense...seen at the end of all  Big Pharma pill commercials too

Colonel Klink's picture

Oops, seems as if the Muppets are getting nervous when the true gets revealed.

yogibear's picture

The Fed is out buying assets with infinite printed money. Only thing that stops this is a currency crisis.


Dr. Engali's picture

Damn squiddy. You sold me all these stawks, and now you tell me they are overvalued? What should I do? Sell them and go into overvalued bonds? Please help me squiddy, this frog is soooooo confused.

Yen Cross's picture

    "Tell me lies...tell me lies... tell me sweet little lies."  The Muppets are so conditioned to being counter traded against by the squid, that they can't see the shit storm coming their way.

fooshorter's picture

Sucker in shorts just to blow them away, brilliant. 

If they can't convince people to buy on the long side, why not sucker them into borrowing on the short side, same effect once they squeezed!


Also is anyone seriously goldmans client still? I mean how stupid and naive do you have to be? /rht sarc.

ebworthen's picture

Time to slay some muppets openly and unabashedly it seems.

If and when TPTB crash this thing all over again and clear more of the sheeple's chips off the table - this analysis could be used as legal defense that they warned clients.

Warrior85's picture

Goldman is finally turning honest and now people start complaining? I agree with Goldman for just this one time. It seems even banksters sometimes tell the truth. I will trade the coming downturn using cfd's and copytrading

Dr. Engali's picture

Goldman's turning honest...Lol that was a good one.

L_Conquistador's picture

How dare GS fail to perpetuate the lies!?!  We muppets look forward to getting the next month's GS report about tremendous opportunties in the Dutch tulip market.     

Sufiy's picture

Jim Rickards: "The Fed Is Insolvent And Wants Gold To Rise Orderly" 

Jim Rickards discusses QE and FED 4 Trillion balance Sheet and its implications for the economy, US dollar and Gold. FED is insolvent if they mark to market their assets now. If economy is not so strong as they want us to believe FED will be tapering into the weakness with coming recession in 2014 as the result of it. It is possible that in this case FED will have to play down the Taper or ever increase QE again.   Today's action in the market is very interesting: Gold was Smashed-down from the all-important levels $1250 - $1270 after which Shorts will be burned, but Gold Stocks are not biting into this new attack and are holding well to the upside so far. It is the very important sign of the strength of the Gold market break out to the upside.


StychoKiller's picture

Au will rise in a linear fashion, of course, the SLOPE of that line will tend towards infinity!

Wahooo's picture

Even Hitler wasn't this stupid.

Save_America1st's picture

The Wolves of Wall Street

PontifexMaximus's picture

Someone should ask GS to show him their book.