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SocGen 10-Year Outlook: 100% Chance Of Recession; S&P To 4,000 Or... 500

Tyler Durden's picture




 

No matter what, SocGen sees US equity performance over the next 10 years as modest at best. They note that US equities face three headwinds: cyclically-adjusted valuations (CAPE, starting date 1881) have returned to very expensive territory, corporate margins stand at historically high levels, and after already five years of growth from the 2009 trough, we estimate that the probability of another recession kicking in is close to 100% within the forecast timeframe (the longest cycle ever was 120 months, or 10 years). While their central case is 'moderate growth and inflation', they project a possible high growth surge to 4000 for the S&P 500 and a deflation scenario which would put the S&P 500 at 500 (-12% per annum).

 

Via SocGen,

This is the second edition of our 10-year equity outlook. The first was published in July 2009, when the economic consensus was still weighing up deflation fears and valuations were depressed (read: an excellent entry point.). At the time we set an S&P500 target of 1300 under our central scenario (in mid-June 2009 it was 923).

[ZH: So in 2009 they forecast the S&P to be at 1300 in 2019... and we are now 50% higher than that already!!]

US equities

US equities face three headwinds:

cyclically-adjusted valuations (CAPE, starting date 1881) have returned to very expensive territory,

 

corporate margins stand at historically high levels, and

 

after already five years of growth from the 2009 trough, we estimate that the probability of another recession kicking in is close to 100% within the forecast timeframe (the longest cycle ever was 120 months, or 10 years).

 

A recession costs on average a 22% drop in US earnings

The most recent economic recession triggered by the collapse of Lehman Brothers caused an unprecedented wave of US earnings downgrades and was comparable in effect to the two previous oil shocks, the Gulf war and the Dot-Com bubble burst.

 

But US equities have supports as well, such as impressively strong balance sheets and the beginning of a new M&A cycle, backed by a highly reactive central bank.

Central scenario: moderate economic growth and inflation

Our central scenario projects moderate underlying economic growth of 5% per year over the next few years, i.e. below the long-term growth trend (8.6%). We have also adopted a scenario whereby inflation will gradually increase at a modest rate, until it pushes down the normalised 10-year moving P/E rate slightly, to below its long-term average of 20x. Based on these assumptions, we expect the S&P 500 to rise by +3% p.a. and reach 2500 points in 10 years.

But there are 3 Altnerative Scenarios...

Alternative scenario 1: sharp growth & high inflation +2%/yr

In a high inflation scenario, two opposing forces go head to head: on the one hand, inflation prompts an acceleration in (nominal) reported corporate profits and, on the other, it reduces equity valuations. The combined forces would be likely to have a positive impact on equity markets (+2%). In this scenario, while nominal returns are positive, real returns would be eaten up by inflation.

Alternative scenario 2: sharp growth & moderate inflation +8%/yr

In this scenario, the equilibrium between growth and inflation would be well managed by the central banks and /or the US gas shale revolution would help maintain inflation within a low range. This is a kind of continuation of the trend we have observed over the last couple of years in the US. On this assumption, equity market P/Es would remain high and corporate profits would accelerate rapidly. Our scenario would yield an annualised equity index slope of about 8%, pushing the S&P 500 to 4000 points at the end of the period.

Alternative scenario 3: depression -12%/yr

We have no doubt that a deflation scenario, like that of the 1930s in the US, would considerably damage corporate profits and the equity market valuation, eventually impacting the equity markets themselves. We saw this in Japan between 1995 and 2005, when the collapse in listed Japanese company ROEs severely cut into their equity valuations and thus the Nikkei index. We believe such a scenario would put the S&P 500 at 500 points in 10 years (-12% p.a.).

 

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Thu, 06/05/2014 - 18:33 | 4828298 maskone909
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Were already in a depression

Thu, 06/05/2014 - 18:41 | 4828321 gmrpeabody
gmrpeabody's picture

Let's see here..., S&P to either 4000 or 500, whichever comes first.

Matches my estimate exactly.

Thu, 06/05/2014 - 18:49 | 4828348 kill switch
kill switch's picture

Ten year outlook????? HAHAHAHA We won't be here in ten fucking years you morons,,,the political systems as we know it will have collapsed,,,,Joseph Tainters collapse of complex societies.....!! And that was fucking Rome without computers....Good luck world.

 

Thu, 06/05/2014 - 18:49 | 4828349 DeadFred
DeadFred's picture

S&P down to 500 takes the first two weeks of the downturn but do they say what happens then?

Thu, 06/05/2014 - 18:52 | 4828356 Redneck Hippy
Redneck Hippy's picture

When is a forecast not a forecast at all?

Thu, 06/05/2014 - 19:13 | 4828406 disabledvet
disabledvet's picture

When you get hit by a five billion dollar fine? Or was that the other French Bank?

"When things get serious you have to sue."

Fri, 06/06/2014 - 03:39 | 4829246 OldPhart
OldPhart's picture

[ZH: So in 2009 they forecast the S&P to be at 1300 in 2019... and we are now 50% higher than that already!!]

Well, yeah, but who knew at that time that the Fed, along with the rest of the world's central banks, would go full, batshit crazy?  I didn't, I expected a full crash by 2010.

Yet here we are...propped up with lies and, in Europe's case, negative interest rates.

They went full retard...no one should ever go full retard.

Thu, 06/05/2014 - 18:35 | 4828303 SyndicateOne
SyndicateOne's picture

Nothing matters other than the stock market going up. THAT'S IT! That is unless...it goes down. Then what do we all do?

Thu, 06/05/2014 - 18:37 | 4828304 fonzannoon
fonzannoon's picture

I believe they had a gold forecast as well.

 

http://m1.marketwatch.com/articles/BL-MWTELLB-14526?mobile=y&mobile=y

 

Thu, 06/05/2014 - 19:33 | 4828466 Its Only Rock N Roll
Its Only Rock N Roll's picture

Seriously...why even waste the effort on writing that drivel?  Who the hell reads it and trades on it? 

My forecast for the age of my death is somewhere between 43 and 120. 

Fri, 06/06/2014 - 03:41 | 4829248 OldPhart
OldPhart's picture

Mine is 62, on the side of a desert dirt road, left to dry up into a dessicated corpse.

Still don't know what killed me.

Thu, 06/05/2014 - 18:37 | 4828311 Goldilocks
Goldilocks's picture

Fifth Dimension - Up Up & Away , My Beautiful Balloon - Bubblerock Video 3
http://www.youtube.com/watch?v=sQVLsvZcr34 (2:57)

Thu, 06/05/2014 - 18:39 | 4828314 nosoeawe
nosoeawe's picture

In Summary: SOCGEN says the market will go up, down, up and down, sometime in the next 10 years. 

Thu, 06/05/2014 - 18:40 | 4828320 Flying Wombat
Flying Wombat's picture

And in the footnotes of the research note, they also predict it will rain somewhere in the United States sometime this year.  :-)

Thu, 06/05/2014 - 18:41 | 4828324 MrTouchdown
MrTouchdown's picture

They used the "D" word. Eric Holder just felt his indictment muscle twitch.

Thu, 06/05/2014 - 19:06 | 4828398 Goldilocks
Goldilocks's picture

Eric Holder to Rep. Louis Gohmert - "You don't want to go there, buddy!"
http://www.youtube.com/watch?v=Ay9eThmzp1Q (0:50)

Thu, 06/05/2014 - 18:48 | 4828344 John Law Lives
John Law Lives's picture

Market cap-to-GDP was above 119% as of yesterday, but it seems the hope of moar crack pellets from central banks trump fundamentals.

http://www.gurufocus.com/stock-market-valuations.php

Thu, 06/05/2014 - 18:50 | 4828350 NOTaREALmerican
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SocGen: just more European panzies who hate everything America stands for, and the troops.

Thu, 06/05/2014 - 18:58 | 4828377 orangegeek
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SucksGen

Thu, 06/05/2014 - 19:04 | 4828395 financialrealist
financialrealist's picture

lets see, down..11.4...17.6...27.9...42...my guess is 60.  second is 5.2% greater, third is 10.3% greater, fourth is 14.1 greater, my guess is 20% greater, a collapse of 62%.  putting it at 850 give or take....any takers?

Thu, 06/05/2014 - 19:15 | 4828419 NOTaREALmerican
NOTaREALmerican's picture

I predict it goes up-n-up-n-up-n-up until somebody big doesn't get paid (but I no longer know what the definition of "paid" is).

Thu, 06/05/2014 - 19:13 | 4828411 surf0766
surf0766's picture

What difference does it make?

Thu, 06/05/2014 - 19:16 | 4828424 dirtyfiles
dirtyfiles's picture

pin point accuracy wow..

Thu, 06/05/2014 - 19:24 | 4828448 Spungo
Spungo's picture

They expect gold to sell for 30% below mining cost? Who would be flooding the market with all that cheap gold?

Thu, 06/05/2014 - 19:27 | 4828458 financialrealist
financialrealist's picture

cental banks are holding gold down to hoard...when the system resests, gold reserves will play key role.  surpress price to buy and hoard. just look at china...everyones perapring...just tyring to keep the wheels from falling off as log as possible.   

Fri, 06/06/2014 - 05:22 | 4829293 hugovanderbubble
hugovanderbubble's picture

SocGen Derivative Book Losses can exceed 35 Bn Euros ( Late May 2014)...WARNING------HOLLANDE

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