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"Sell In December And Go Away" - Why Goldman Sees The Market Going Nowhere In 2016

Tyler Durden's picture




 

When it comes to 2016, Goldman says that it is "deja vu all over again", and that the S&P 500 index will tread water for a second consecutive year. Specifically Goldman says that its "year-end 2016 target of 2100 represents a 1% price gain from the current index level (2089), which itself is just 1% above the year-end 2014 level of 2059."

Hardly the double-digit annual growth everyone has gotten used to over the past 7 years, that was so easy anyone could do it.

Here are the reasons why Goldman expects all the main themes from 2015 to be repeated in the coming year, and why the one can just sell on December 31, 2015 and go away for the next year:

  • In many ways our 2016 forecast is “déjà vu all over again.” The US stock market has mostly traded sideways during 2015 with the index hovering in a narrow  band except for a brief late summer correction. Return dispersion across the market and within sectors has been low. Market breadth is currently at one of the lowest levels in 30 years. About 75% of large-cap core mutual funds is lagging the benchmark. The equity long/short hedge fund index has returned -2% YTD, trailing S&P 500 for the seventh consecutive year.  About 75% of large-cap core mutual funds is lagging the benchmark. The equity long/shorthedge fund index has returned -2% YTD, trailing S&P 500 for the seventh consecutive year.
  • In terms of fundamentals, Goldman Sachs US Economics Research expects tepid GDP growth of 2.2% in both 2016 and 2017. We forecast S&P 500 earnings will rise by 10% to $120 per share in 2016 and by 7% to $129 in 2017 (see Exhibit 1). However, the headline EPS growth rate is misleading because it reflects a partial recovery in Energy sector profits after they collapsed by 80% this year in concert with the plunge in crude oil. EPS growth outside Energy will equal 8%. We expect flat net profit margins of 9.1% in 2016 and 2017.

  • In terms of valuation, both the aggregate S&P 500 index and the median stock trade at the high end of a range of fair value based on most metrics. Our year-end 2016 index target of 2100 implies a P/E multiple compression of 8% to 16.2x our top-down 2017 EPS estimate, or 12% based on the bottom-up consensus earnings forecast. S&P 500 P/E multiple fell by an average of 10% in the 12 months following the start of prior tightening cycles. The typical S&P 500 constituent has a forward P/E of 17.2x, an EV/sales of 2.4x, an EV/EBITDA of 10.8x, and a P/B of 3.0x. Only 6% of the time during the last 40 years has the median stock traded at a P/E multiple higher than it does today.
  • In terms of money flow, corporate repurchases will remain the primary source of demand for US equities. Firms that have returned cash to shareholders via buybacks and dividends have outperformed for 25 years. The pattern was repeated this year and the trend will likely continue in 2016 given our muted equity return forecast (see S&P 500 cash spending trends: Investing vs. returning capital, November 6, 2015).
  • In terms of risks, uncertainties include (1) interest rate path different from our baseline assumption of year-end 2016 fed funds at 1.4% and 10-year bond yields of 3.0%; (2) global economic growth below our 3.5% forecast; (3) US presidential election; and (4) geopolitics.

And in charts:

 

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Tue, 11/24/2015 - 14:59 | 6833696 Dr. Engali
Dr. Engali's picture

In other words if we live to see 2016 BTFD for the most powerful rally in the history of the market.

Tue, 11/24/2015 - 15:26 | 6833893 Ms. Erable
Ms. Erable's picture

Squid Insiders are buying defense contractor stawks.

Tue, 11/24/2015 - 15:00 | 6833697 MFL8240
MFL8240's picture

Market will go wherever paper money will take it!  The idea of valuation is laughable as is Goldman’s assessment of things.

Tue, 11/24/2015 - 15:05 | 6833741 Cult of Criminality
Cult of Criminality's picture

People pay for that advice?

Tue, 11/24/2015 - 15:06 | 6833742 Tasty Sandwich
Tasty Sandwich's picture

Well, if Lloyd backs it then I'm buying.

Tue, 11/24/2015 - 15:06 | 6833748 Cult of Criminality
Cult of Criminality's picture

Well,thats the only funny thing I have seen today.

Tue, 11/24/2015 - 15:07 | 6833757 madcows
madcows's picture

hasn't it already gone nowhere in 2015?

Tue, 11/24/2015 - 15:11 | 6833787 buzzsaw99
buzzsaw99's picture

they left off the "bonus time bitchez"

fuck you, pay me.

Tue, 11/24/2015 - 15:14 | 6833819 inosent
inosent's picture

as soon as we break new all time highs, 2016 will be a year for the bears - maybe not all ultiate crash, but bulls wont have any juice.  looking art the chart, the old 2007 high is still a credible downside target that was never touched. This market reminds me of Euro in 2007-2008. Euro exploded past 140, then 150, then just hovered at 159 for months. it took i think 14 months for 140 to trade but it did, and that was a very credible target. took a loooooong time to hit.

now look at euro.

my o my how thngs change, right? *but* it is *7* *years* later. geez. now, the game has flipped over. the stock market is stubbornly bid. 18 months from now (or less) I expect <14k dow, but as I have posted i wont short until i see the new highs.

Tue, 11/24/2015 - 15:16 | 6833826 _ConanTheLibert...
_ConanTheLibertarian_'s picture

Yes, going nowhere but down.

Tue, 11/24/2015 - 15:18 | 6833845 Arthur Schopenhauer
Arthur Schopenhauer's picture

We got one asshole who works for Goldman Sachs sitting in a cubicle saying one thing and another asshole who works for Bank of America sitting in another cubicle saying another. Put them both together and you end up with two assholes.

Bank of America: The S&P 500 Is Going to Hit 3,500 by the Year 2025

Savita Subramanian, head of U.S. equity strategy and U.S. quantitative strategy, has forecast that the Standard & Poor's 500-stock index will reach 2,200 in 2016. She also included a target of 3,500 by the year 2025.

 

Tue, 11/24/2015 - 15:21 | 6833862 polo007
polo007's picture

According to Bank of America Merrill Lynch:

https://app.box.com/s/kjp0andkn5c3hwf5w98fgmpitzyrwt3o

Introduction: The “Great Divorce”

The global recovery is now in its seventh year, and there should be much to celebrate. This is already one of the longest business cycle expansions (at least for the US) during the post-War period, and even the fact that the Fed is about to embark on a rate hiking cycle ought to be viewed as a testament to just how far we have come from the depths of the Great Recession.

Yet not all is well with the global economy, especially outside the US. Two of the G7 economies are in a recession (Japan and Canada) and so are two of the four BRIC economies (Brazil and Russia). What is the reason for this divergence between the US and the rest of the world?

In our view, this parting of paths is at least partly because the US has exported its problems to the rest of the world. Five years of Fed quantitative easing (QE), by driving both US interest rates and the US dollar to the ground, pressured the rest of the world to adopt interest rates that were too low for their own good, so that countries from China to Brazil, from Australia to Canada, went on a borrowing binge. One way of looking at it is that the US has been able to delever smoothly only by forcing the rest of the world to lever up in a big way. McKinsey recently estimated that global debt has grown by $57 trillion since 2007, a 40% increase.

China, because of its relatively inflexible FX regime, imported US monetary policy perhaps more absolutely than others. As a result, its debt binge went further than most other countries. McKinsey estimated that Chinese debt has quadrupled since 2007 and its debt to GDP ratio has risen above that of the US.

What does this mean for rates and currencies investors? On the eve of the December FOMC meeting, we think the question is not whether the US economy can live with higher interest rates and a higher US dollar. The question is, given the semi USD/RMB peg and China's increasing open capital account (which come at the expense of China's monetary independence), whether China can live with higher US interest rates and a higher US dollar.

We are skeptical. This why we think the USD/RMB peg, a marriage of convenience that has been the anchor for the global growth model for the better part of the last 15 years, is headed for a divorce, and we think the RMB devaluation on 11 August was a first small step in this direction.

We see the RMB declining as much as 10% against the greenback in 2016, and we think this will fundamentally shape the investment outlook for the rates and currencies market. The impact of additional RMB depreciation would weigh further on already beaten down emerging market and commodity currencies. To the extent that it would slow the Fed hiking cycle, it would be supportive for US fixed income assets even though it would slow the rise of the USD vis-à-vis the likes of the euro and the Japanese yen. We like owning 30y TIPS, as RMB depreciation will likely lower the real terminal Fed Funds rate.

As for other macro themes in 2016, further easing by the European Central Bank should help support peripheral debt and give way to outperformance of Eurozone rates versus their US counterparts, especially at the long-end of the curve.

In contrast, we are concerned that the scope for further easing by the Bank of Japan is limited and think that the market is underpricing the risk of a potential backlash.

Brexit risk is on the rise. We recommend positioning for Brexit risk by buying UK rates vol against US rates vol.

Finally, we think the best way to positions for the US election is by selling government sponsored enterprise (GSE) debt versus Treasuries as headlines of GSE reforms gather pace.

Tue, 11/24/2015 - 15:23 | 6833873 margincall575
margincall575's picture

I think the world of ZH but ive never really understood why keep posting "what goldman thinks" In my world if ones a criminal, idiot, you name it, I ignore them not give them attention they want

Tue, 11/24/2015 - 15:24 | 6833880 Black Warrior W...
Black Warrior Waterdog's picture

They're doing God's work.

Tue, 11/24/2015 - 15:24 | 6833884 Consuelo
Consuelo's picture

 

 

If nothing more than the events of the past 24 hours, the current geopolitical situation hardly suggests 'going away' for anyone.   Proof that the arrogance of the financial elite in the U.S. still believe the universe revolves around their galaxy.   A couple more planes getting shot outta the sky, and a market pants-shitting episode is but a fleeting moment away.

Tue, 11/24/2015 - 15:29 | 6833911 FreeShitter
FreeShitter's picture

Agreed. It will take a few nukes though to get their attention.

Tue, 11/24/2015 - 17:31 | 6834708 J Jason Djfmam
J Jason Djfmam's picture

Long Depends!

Tue, 11/24/2015 - 15:38 | 6833966 Good bi bull
Good bi bull's picture

Yea but they are only "doing Gods work" so im sure they wouldnt like to us Proles.........or would they?

Tue, 11/24/2015 - 15:52 | 6834066 DOGGONE
DOGGONE's picture

President Obama:
Thwart terrorists!

End this deception by omission NOW.
http://showrealhist.com/begun.gif
http://showrealhist.com

Tue, 11/24/2015 - 16:08 | 6834146 john gault-66
john gault-66's picture

Let's look at Lloyd's "investment" with Clinton's hedgie son-in-law.

Tue, 11/24/2015 - 16:59 | 6834491 besnook
besnook's picture

a presidential election year market always goes up.......until it doesn't.

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