Groupthink 101: What All Goldman Sachs Clients Believe Will Happen

Tyler Durden's picture

At the beginning of the year, all - as in all - of the smart money expected a rising yield environment and a recovering economy. They were all wrong. Oddly enough, they still believe pretty much the same, using seasonal scapegoats to explain away their mistakes. As for what the most selective subset of the smart money believes, here is Goldman's David Kostin with the summary: "Almost all clients have the same outlook: 3% economic growth, rising earnings, rising bond yields, and a rising equity market." Goldman's own view doesn't stray much: "Our S&P 500 targets of 1900/2100/2200 for end-2014/2015/2016 are slightly more conservative but generally in line with consensus views." And of course, when everyone expects the same, the opposite happens... even if this is one of those financial cliches we wrote about yesterday.

More observations on Groupthink 101 from Goldman:

This week we met with a large cross section of our institutional clients and everyone agrees with the following consensus outlook: (1) the US economy will reaccelerate to a 3%+ GDP growth rate beginning in the current quarter; (2) S&P 500 earnings per share will rise by roughly 8% to $116; and (3) the US equity market currently trades around fair value.

S&P 500 has advanced 4% YTD and stands at an all-time high of 1920. Our multi-year S&P 500 targets remain 1900 at year-end 2014 (-1% versus
today), 2100 at the end of 2015 (+9%), and 2200 at the end of 2016 (+15%). Most clients agree with our outlook of rising US equity markets but expect the targets will be reached sooner than we anticipate, in many cases by about 12 months. If S&P 500 climbs to 2100 by the end of this year and bottom-up earnings converge to our top-down forecast, the market will have a bottom-up forward P/E of 16.8x vs. 15.7x today.

Clients also have a consensus outlook for the bond market. Although interest rates have confounded most fund managers this year with 10-year Treasury yields falling from 3.0% to 2.4%, investors uniformly expect rates will rise by year-end 2014. Most cite a target of 3.0% to 3.25%. According to Consensus Economics, disagreement about rates is low relative to postcrisis history. The mean 12-month expectation for 10-year Treasury yields equals 3.5%, with a standard deviation of 27 bp. With the exception of a few outliers, almost all estimates fall between 3.4% and 3.8%.

Ten-year US Treasury yields are at the lowest level in nearly a year. Debate exists whether the 2.4% yield reflects (1) weak 1Q GDP, (2) shortage of AAA-rated assets, or (3) a deteriorating long-term economic outlook. Regardless of the reason, measures of implied interest rate volatility suggest low uncertainty and dispersion about current interest rate levels. Our bond strategists continue to forecast a 3.25% yield by year-end 2014.

The ultimate reason for the fall in yields does have implications for our medium-term equity outlook. If rates are lower due to a growth soft-patch or thanks to supply/demand imbalances there is a benign, and perhaps even positive, impact on the stock market as growth improves. However, risks to long-term growth would outweigh any short-term benefit from lower yields. In terms of the economic outlook, minimal difference exists between Goldman Sachs US Economics GDP forecast and consensus. We forecast 2Q annualized GDP growth rate will surge to 3.7%, up from -1.0% in 1Q, and growth will exceed 3% during the balance of 2014 and in 2015. Consensus expects 2Q growth of 3.5% and growth of 2.5% in 2014 and 3.0% in 2015.

In terms of profit growth, our forecasts of sales, margins, and earnings are close to bottom-up consensus estimates. Our top-down model forecasts 2014 year/year revenue growth of 6% compared with consensus of 5%. We anticipate flat margins of 8.9% this year while analysts expect margins will climb to 9.3%. However, from an EPS perspective, our top-down 2014 forecast of $116 per share is nearly in line with the bottom-up consensus of $117. Our 2015 forecast of $125 is slightly below consensus of $130. That difference stems from a nearly 100 bp gap in margin views (we expect 9.0% vs. consensus of 9.9%). Information Technology is the key sector to watch.

In terms of valuation, most of the metrics we use suggest the S&P 500 trades around, if not slightly above, fair value. In aggregate, S&P 500 trades at 15.7x forward 12-month EPS, above the 35-year average, and at 17.7x trailing EPS, about one turn above the average trailing P/E since 1921. The median stock trades at 16.9x forward earnings which is more than one standard deviation above the long-term average.

Other valuation metrics such as the Shiller cyclically-adjusted P/E ratio suggest the market is 30%-45% overvalued while our Normalized EPS framework suggests a more modest 10% premium to fair value. Valuation approaches based on interest rates (both real and nominal) lead us to the similar conclusion using either Treasury or corporate bond yields.

The constructive consensus outlook for the equity market masks the fact that 2014 has been an extremely difficult stock picking environment. As noted previously, dispersion of returns across the S&P 500 and within sectors ranks in the first percentile relative to the past 30 years. In addition weak performance in Consumer Discretionary and strong returns in Utilities run counter to the positioning of mutual funds and hedge funds. Both sector performance and dispersion have improved very modestly over the past two weeks, offering some hope.

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Oh regional Indian's picture

But if perception is reality and the 100th monkey effect is true (which it is) then all they need is consensus.

And that is the dominant reality.

That is why the control of the media...

it can be fake, but it has to be a consensus....

Operation culture creation....

OceanX's picture

That is exactly the mindset of the Titanic passengers...

CrashisOptimistic's picture

Sort of like

in order to be a muppet you must think like a muppet

Bloody Muppet's picture

I agree, because that's what everyone says. 

disabledvet's picture

trust me on this: "Wall Street has a a Goldman Sachs" (the dumb money) "algo."
I've never seen it...just some dude on the couch...but even a idiot can see they're entirely predictable now.

predictability does not liability make...and one "lawyers up" better than these clowns...but at a 1000 bucks an hour even that has its limits too.

vaft's picture

The "if everyone believes the market will go up, then the market will go up" theory ignores the inevitable birth of a black swan.


inky's picture

Dear goldman who said having money is the best thing in life?

You obviously haven't had two Kit Kats fall out of a vending machine at the same time.

Yours Sincerely, inky 


chunga's picture

Arugula is loaded with fucking vitamins; but also it germinates practically overnight.

So right there, that's pretty good too. Some peopl e swear it's an aphrodisiac. Fuck you goldman sachs fuck you.

Vooter's picture

We're gonna need more rat poison for these vermin...

Yellowhoard's picture

Cue Michael McDonald "What A Fool Believes".

intric8's picture

The real investment is in ammo and guillotine production

I am Jobe's picture

Don't forget RainX to ensure the blade dosen't rust. 

Haager's picture

1900 at year end, 2100 in 2015 and 2200 in 2016. Oh, they are talking about the gain in spx in these years?

Amish Hacker's picture

Looks like they have all the sheep rounded up and headed in the same direction. You can guess what happens next.

wmbz's picture

Slauterhouse as planned, then round up more sheep, there are always plenty!

CrashisOptimistic's picture

Muppet is as muppet does.

Now we know why Goldman calls its clients muppets.

I am Jobe's picture

Is GS going to start including Blow and Hookers in the USSA as part of their Porfolio or have they already started to include it. 

ptoemmes's picture

And many muppets will be slain on the edge of these beliefs.

I am Jobe's picture

True , and many nations as well. 

Unknown Poster's picture

QE has been propping up equities. Without QE equities fall. What are the alternatives? Some will choose US debt and rates will fall. The taper is an attempt to baffle 'em with bullshit, but when QE stops (temporarily) rates will fall.  Of course there is the question of "Belgium" buying US debt, but it is not entirely clear who is really doing the buying.

disabledvet's picture

"QE is stimulus."

Or should I say WAS stimulus.

Just how much capital has been "extended" here again?
A couple of trillion?

No one is arguing with the return...sure are a lot of people bitchin' about the interest rate tho.

Well..."here it comes."

Problems with communications Wall Street?

Unknown Poster's picture

QE is a rotation out of bonds for the banks that held them. The stated purpose was to get the banks to loan money into the non-financial economy, but the funds found their way into the stock market instead. When QE ended cold turkey the previous two times the prop under equities fell away and any illusion of recovery got crashed. Hence we have QE-moar, but nobody wants to win the Von Havenstein award for printing.

chubbar's picture

I don't know, I just sincerely doubt that what is said publically is what is personally believed. These guys aren't stupid, they just aren't allowed to publically say what they think. Not much different than a lot of people in position to know that this world is on a collision course with financial armageddon due to Central Banking and the fucking psychos running it.

orangegeek's picture

What part of "US GDP for Q1 was -1%" doesn't Goldman understand.


Or better yet, "say it over and over again and the truth doesn't matter" may not work for Goldman this time around.

I am Jobe's picture

Relax will you, they have yet to include blow and hookers, they know Amerikans well enough. 

intric8's picture

7 buttons, -3% -2% -1% 0% +1% +2% +3%

my money's on a random four legged mammal predicting economic growth better than the consensus of 3000 economists

Shad_ow's picture

They may be predicting what the report will show, not reality.

NidStyles's picture

Science is not a democracy. Especially social sciences.

F0ster's picture

Everyone seems clueless about the 10 year dropping. My lamen guess is all the smart money is selling so called fair market priced stocks and getting into the less leaky Treasury boat. When the 'E' in the 'fairly priced' P/E ratios collapse in the second quarter, all hell may break loose in equities.

Handful of Dust's picture

I don't know, Foster; some of those PE's at 489 look pretty tempting....

Dexter Morgan's picture

Goldman can lick my nut-sach!!

I Write Code's picture

So if and when bonds fall 30% in six months "as expected" who takes the loss?

Handful of Dust's picture

But that pretty lady with the tiny mini skirt on our local TV station said the analysts still see signs of The Recovery.

Gee, she sure is cute....

What did she say again....?

Chuck Knoblauch's picture

Goldman treats all their clients the same?


There has never been a free lunch served at Goldman.

Nice graphs ... hehehe.

Sudden Debt's picture

Easy! "Investors" who are to lazy to do their homework when investing only want to give their money to others who also have a shitload of money because the reason why they have so much money is because they're succesfull in what they preach right?
So they give them their money not knowing that those other rich guys actually got rich not by helping others to become more rich but by scamming them into believing what they believe.

So where should you put your money than?
well... if you want to make money for real, you should do it yourself.

These day,s you've got the robot trading desks that give you the buy signals directly in your account when you subscribe. Up to 8% profit per month...
But... why would they offer such a system when it's that succesfull as they say? If true you'd own the world in 20 years...

There's so many promises but I've never known anybody who actually got rich by it.

farmboy's picture

Being a contrarian is if you are in front of the herd and the herd will stampede you. But buffalo's are shortsighted so they run for the canyon were they fall.

So you go to the canyon and wait below and get a buffalo on your head. So be there but not right under :)

Government needs you to pay taxes's picture

Silly goose, these publications are not for Goldman Sachs 'clients', but rather Goldman Sachs 'counterparties'.  The reason they put this in print is so they can keep the Fedcoats happy (thus keeping them on the inside track for the really big, DC-sponsored fraudulent schemes) while providing the liquidity from muppet counterparties for their prop trades in the opposite direction from what they put in print.

buzzsaw99's picture

the squid makes moar $ being wrong than i make being right. that pisses me off.

zipit's picture

If you transact with the Squid, the Squid makes money.

monad's picture

Other than the unsupportable premise of the headline, 

Given there exist disambiguous entities GS and GS clients,

and they align to black hats & sheep,

then what is actually postulated is an assertation that we are so highly specialized that any of us can be fucked to death at will without rocking the boat, because we are too focused in our area of specialty, and do not have (by design) sufficient "free" time to keep up with the affairs of our government servants.

It dursn't have to be troof. You just has to repeet it enuf.

Back to you, BOB 

razorthin's picture

I take solace in the fact that no beginning of any ending went any differently.

d edwards's picture

It appears the "muppets" will beleive anything they're told.