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Multiple Expansion Is Over, Goldman Warns, "US Stocks Will Close 2015 Only 5% Higher"
The reason why moments ago we showed a chart demonstrating that all of the surge in the S&P500 from the October lows can be explained with multiple expansion...
... Is that in a world in which there is no more multiple-expansion - which is merely hope of cheap and easy money - and where the S&P has to grow solely on the back of EPS growth, there would be no all time high S&P, and now relentless diagonal increase in the nominal value of stocks. This is also the basis behind the chart that "amazes" SocGen how the Fed has broken the market.
Which begs the question: will P/E multiple expansion, which at last check was just about 19x on a GAAP basis, continue, and will it hit David Tepper's mythical "20X", or are the days of growth pulled from the future over?
Well, according to Goldman's chief strategist David Kostin, who initially had forecast a 1900 price target on the S&P500 for year end 2014 only to boost it to 2050 in the summer, the days of multiple expansion are now over. As a result, Kostin suggests that the best the S&P will do in 2015, which trading at 2052 at last check is is already above his year end target, is rise a modest 5% to 2100.
Here is David Kostin's take:
We forecast US stocks will deliver a modest total return of 5% in 2015, in line with profit growth. The US economy will expand at a brisk pace. Corporations will boost sales and keep margins elevated allowing managements to both invest for growth and return cash to shareholders via buybacks and dividends. Investors will cheer these positive fundamental developments.
However, 2015 will prove to be another challenging year for active equity managers. Volatility will remain low. Stock return dispersion will stay in a narrow range making alpha generation difficult. Mutual funds and hedge funds typically lag the S&P 500 during low dispersion regimes. This year is a good example: S&P 500 realized volatility has averaged 11 YTD (37th percentile since 1962) while rolling three-month return dispersion has averaged in the second percentile versus the past 35 years. Just 14% of large-cap core mutual funds has outperformed the S&P 500. Equity long/short hedge funds have returned an average of 1% YTD, lagging the index for the sixth consecutive year.
Strategically, the multiple expansion phase of the current bull market ended in 2013. The strong S&P 500 YTD price gain of 10% roughly matches the realized year/year EPS growth of the index. The index has climbed by 17% annually during the past three years as the consensus forward P/E multiple surged by nearly 60% from 10x to 16x.
From a tactical perspective, the S&P 500 will continue its upward trajectory during the first-half of 2015. The index will climb by 5% to 2150, corresponding with a forward P/E multiple of 17x our top-down EPS forecast or 15.8x on a bottom-up basis.
However, we expect the P/E will contract and the index will slip during the second-half of 2015 as the Fed takes its first step in the long-awaited tightening cycle. Our S&P 500 year-end 2015 target of 2100 implies a modest 5-10% P/E multiple compression to
16.0x our top-down 2016 EPS estimate or 14.6x bottom-up consensus earnings estimates.
Every recent investor discussion centers on the question of how stocks will trade when interest rates start to rise. We expect multiples will compress while volatility and stock return dispersion remain low. Our forecast of solid US GDP growth underpins our expectation of low volatility, low dispersion, and low stock returns in 2015.
We expect a benign equity market reaction to the first Fed rate hike. Fed funds have been anchored near zero for six years. The Fed has been transparent in communicating the timing and slow trajectory of its planned exit from the unconventional monetary policies it has pursued since 2008. Goldman Sachs Economics expects the first hike will occur during 3Q and short-term rates will end 2015 at 0.6% while the 10-year yield will rise to 3%.
Not everyone agrees with Kostin:
Many fund managers disagree with our view and believe higher equity volatility will accompany higher interest rates. They argue that once the Fed begins to hike uncertainty will abound regarding the pace of further tightening and volatility will jump. Our response to those arguments is that the interest rate swaption market implies a relatively steady and shallow path of future hikes with volatility remaining quiescent.
Where we disagree is two places: i) the Fed will not hike, at least not voluntarily, as the economy will continue to deteriorate and with a cold, snowy winter already in the works, look for 2015 to be a replay of 2014, when everyone predicted solid growth, only for total GDP to post another year of declines; ii) if indeed multiple expansion ends, the resultant selling will be so vicious and rapid that it will immediately result in a contraction in end demand, leading to a double whammy by making buybacks impossible, crushing EPS and forcing fabricated non-GAAP numbers to finally catch up with GAAP.
The only question is whether once the market tumbles when all this materializes, if Bullard will once again jawbone the algos to BTFATHD, or if this time, the Fed will indeed welcome higher vol as the minutes yesterday warned.
Sadly, after 6 years of constant parental supervision by the Fed of its deformed, mutant "market" baby, which as John Hussman correctly said is 100% overvalued thanks to $11 trillion in global central bank liquidity, we somehow fail to see Aunt Janet allowing stocks go to trade on their own, and in the process crushing 6 years of centrally-planned "wealth effect" efforts.
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If Goldman says it, it must be true...right?
TALK ABOUT RINGING THE BELL!
Sheeshhh..
They're covering their ass to avoid blame for the implosion they know is here now.
goldman? you mean those guys who only win 100% of the time? its perfectly normal to have a one hundred percent success rate when trading, right?
Multiple expansion is over.
Ludicrous expansion to begin shortly...
They're on a mission....
http://www.youtube.com/watch?v=LMoD2m5pzZU
RE: Jersey/Cayman cross-holding offshore vehicles being used to skirt compliance rules.
http://www.ft.com/intl/cms/s/0/a458f5da-70a4-11e4-9129-00144feabdc0.html...
Waiting for when 4 key shorts request information related to their trading history. It's all fun and games until someone pisses off the wrong guy(s).
I don't know, lbut my Mar. '15 short is now out of the money, and I'm putting in an order to buy it back at 2040 or better; which will be a wash. I really need to leave this stupid market alone. Maybe I should write it down in big printing and tape it up on the wall next to my 2009 Marketwatch Headline page; " Worldwide Wreckage".
Goldman... ? Now you better play nice and predict what we want to happen, or your executive suite at the Fed will go back for rent again.
My forcast for 2015 is this will be the year it all falls apart. GS seems to think we are stoopid. The last time the fed decided to raise rates in a slow and methodical fashion and all know how that turned out. I'll say it again, fed funds will never be above 1% again.
It won't prevent the next bubble/crash. All it does is ensure the bubble and crash are bigger and because rates are already low, then they can do nothing to stop a complete implosion
Which is why Hilsenrath is bloviating, and GS is merely slaughtering Muppets when they claim a 10-Year Treasury rate of 3.5% by next June.
Yeah, good luck with that...
Isn't it something we've heard for 6 years, though? Next year the big crash...
I would think that low oil prices (I know, it's all manipulated to hurt Russia) will help the worldwide economy, wouldn't you think?
It certainly will help middle class family and free up some disposable income.
Not trying to pick a fight here, just asking questions.
EIA says lower demand (as well as increased supply)
global economy slowing is driver
blair: first, we have not been advising a crash for the last six years. We had a crash, it is just the last two years that we continue to marvel at the power of central bankers around the world. And no, this "extra" income you talk about will not go to just buy crap we do not need. The amount of debt held by family's is staggering and I think what little "disposable" income there is will be used to try to keep their credit card from defaulting. And remember all these "jobs" are not $35.00 an hour jobs with benefits. Service area, bars, restaurants and part time Christmas jobs is what we have now. The middle class is suffering as never before. And there are very little savings left since the govt. has raped and pillaged our savings accounts so we earn 0 interest.
Nope, I do think this will be over soon and reality will set in. But I have, along with a lot of others here, thought it would have ended a lot sooner.
Well you know, to be honest I'm on your side, and I'm not going to fight your analysis as I believe it is correct, but I wonder sometimes.
The only part I disagree with is on oil. I think oil is being crashed deliberately to crush Russia. I don't believe the whole world realized all of a sudden in November that supplies were up.
That brings me to the 1980s: oil prices declined and the economy boomed.
I don't see how you could be wrong; especially since oil prices have multipliers that pop up everywhere, if they continue low long enough; they'll feed through to Agricultural products and plastics; basically, everything.
Nope, I've been a BTFDer for years knowing at some point the bubble will burst, and if the fed ever tries to raise rates it will burst. That's been my story and I'm sticking to it. BYW, the last deflationary crash was preceded by falling oil and commodities. Now, if the Fed comes out and does QE4 then I will reverse my call.
They've already started QE4: through their Japanese bitch!
USD way too strong as is ... and currency wars about to start?
no way they raise outside of a quarter point or 2
I agree with you 100%; but the timing is turning out to be a tiny bit problematical.
No, Goldman, and the cash isn't going into bonds either.
You assholes are running out of gimmicks.
how ya'll enjoy the daily melt upwards in the Fraud markets goin into the last hour of trading in London again???
Last time I checked the FTSE it was at 6666.66. Told me everything I needed to know.
Nirvana!. Just cannot get any better. All is well. Just buy them. Beyond belief.
If Goldman says stocks will close 2015 at 5% higher, that means that either stock prices are going to collapse or soar between now and the end of 2015. Goldman doesn't believe in 5% higher or they wouldn't be letting the muppets in on it.
New York set for spring like weather on the weekend. All this snow-in-winter nonsense will soon be forgotten (until it snows again... in winter) and the SPOO can climb on as buybacks prove the economy is as solid as the turd sitting in my bowl.
SP500 2014 Target based on FED Balance Sheet regression. 2030. Done!
Now that Fed is finished, why not take regression of SP500 / JPY from Oct 16 lows? JPY = 120 >>> 2100. Done!
(FWIW JPY 145 >>> 2530)
2015 will be the year of currency wars
and this will be good for S&P earnings?
todays mfg PMIs for japan, china, eurozone all lower than expected (and flirting with contraction)
You do not hear too many economists talk about this, but the rate of year over year profit growth is forecast to slow in 2015.
That will not bode well for expanding P/E Ratios either.
Hahahaha "expand" ? When 5 year olds will be financing cars and homes it will maybe expand, as for the coming years with now 10 year visas granted for Chineses citizens. Hold on tight to your jobs and houses! What happened in Europe twenty years ago to the labor market do to Chinese immigrants is about hit the US HARD!
Rip America.
Not too far from now, Americans will be sneaking into China to work on building Chinese railroads. They will set up little communities called "AmericaTowns" where various strange food will be served, including hot dogs and mystery meat loaf.
Permanently high plateau
~Irving Fisher, 1929
Its funny how people still believe this market will go down in a meaningful way.
5% closer to -70%.
Fed will allow the $ to strengthen for a while longer and no need to move FF's anywhere in that climate...US equities highly correlated to $/Y anyway....once the Yen starts to seriously collapse (like 135/144 area)...and correlations start to break down,as they will, the Fed will be back in..prob when US equities are rolling over, and US is awash with Europe and Japan's deflation...
Unless history is no longer a guide, this market will go down in a "meaningful" way. It is never different in that regard. Markets always go down at some point. What is always different is the timing.
Goldman who ?
Not impressed. Goldman has been wrong more than Gartman.
Back and Fill ... butt, where do we start<?>
The USSA's debt has more than doubled since 2008-- so what?!?
...as of today, its stand[ings]count is at ~ $18 Trillion dollops! The DJIA [INDX] is at 17.7k pts. when it was 6.6k pts at the low. Surprise-- the Dow has basically tripled since. What to do when it touches 20.0k by the end of the year,... when QEinfinity is put to bed?
It only makes sense that all the USSA debt was dumped into the DOW/ Collective/Utility Corporate Stock Market wher people are corporations too?!?
Compression is a bitch when in a vacuum... and, when rates inflate gravity becomes an exponential X`factor rimming on the 'event horizon of a black'hole celebrating a 'red`spectrum' enmity.
Conclusion: Satruation = depth of liquidity = Weimar/Zimbabwe-- with the final nail in the coffers via a warring Iraq Redux??? Just like France, Britain, Spain, the Ottoman, and USSR! Politics and War don't make a Republic work... it's the economy stupid...
http://www.usdebtclock.org/
http://stockcharts.com/freecharts/historical/djia1900.html
jmo
B B B But...but Martin Armstrong said the stock market could double in that time ....
"The US economy will expand at a brisk pace. Corporations will boost sales and keep margins elevated allowing managements to both invest for growth and return cash to shareholders via buybacks and dividends."
Fields of golden corn and wheat will wave from sea to shining sea in the laughing sunshine, and children will frolic on lush, summer lawns behind freshly painted white picket fences...
I hate everyone.
lmao
brilliant
needed that
thanks
And to think we executed that McVeigh fella!
Oh, yeah! Time that market Goldman! Whoooo-hooo! No one ever lost money calling tops or bottoms!
Meanwhile "Bulltard took one look at XOM's stock price and declared inflation the best thing ever!"
I mean seriously "make it a really bad winter because natural gas prices have only doubled and are up over ten percent in a week."
No I'm not expecting to see any politicians with their shovels ready. Never too much snow in my book.
In the mean simply manage the risk by adding to your treasury hoard.
If anybody can disentangle all the lies , there probably will be a big crash , then a big boom .
You are about 3 times richer than you think .
See
https://www.academia.edu/9405720/The_Economics_of_Disrespect_Update_I
or
http://andreswhy.blogspot.com/2014/11/the-economics-of-disrespect-update...
Who the f*nk pays attention to multiples? Let them fad lads run! If it doesn't trade at at least 100x TTM, Im not interested..
Translation: Please go short!
Kill da muppet! Kill da muppet! (You know, like the kill da wabbit song)