Goldman Raises S&P Target To 2,400 On "Trump Hope"

Tyler Durden's picture

Having warned for nearly all of 2016 that the market is getting ahead of itself on the back of median P/E multiples that are higher than 99% of all historical reading, Goldman chief strategist David Kostin stubbornly kept his year end S&P target at 2,100 on valuation concerns.

Today, however, with oil soaring and the S&P at all time highs, he finally threw in the towel as a result of the Trump victory, and in a report Kostin writes that the Trump “Hope” will dominate through 1Q 2017 as S&P 500 climbs by 9% to 2400.  However, at that point, "less-than-expected tax cuts and higher inflation and interest rates will limit both upward EPS revisions and any P/E multiple expansion. S&P 500 will end next year at 2300, reflecting a price gain of 5% and a total return of 7% including dividends."

Here is the summary from Goldman:

  • US equity investors have focused “more on hope than n fear” since Donald Trump’s election. Ironically, many commentators believe his campaign rhetoric focused “more on fear than hope.” In 2017, we expect the stock market will be animated by competing views of whether economic policies and actions of President Trump and a Republican Congress instill hope or fear.
  • “Hope” will dominate through 1Q 2017 as S&P 500 climbs by 9% to 2400. The inauguration occurs on January 20 and our Washington economist expects much legislation will be proposed during the first 100 days. The prospect of lower corporate taxes, repatriation of overseas cash, reduced regulations, and fiscal stimulus has already led investors to expect positive EPS revisions. Instead of our baseline adjusted EPS growth of 5% to $123, growth could accelerate to 11% and reach $130, which would support a P/E multiple above 18x. Top “Hope” investment recommendations: (1) Cyclicals vs. Defensives; (2) Stocks with high US versus foreign sales exposure; and (3) High tax rate companies.
  • “Fear” is likely to pervade during 2H and S&P 500 will end 2017 at 2300, roughly 5% above the current level. Our economists expect inflation will reach the Fed’s 2% target, labor costs will be accelerating at an even faster pace, and policy rates will be 100 bp higher than today. Rising inflation and bond yields typically lead to a falling P/E multiple. Congressional deficit hawks may constrain Mr. Trump’s tax reform plans and the EPS boost investors expect may not materialize. Potential tariffs and uncertainty around other policy positions may raise the equity risk premium and lead to lower stock valuations in 2H. The median stock trades at the 98th percentile of historical valuation based on an array of metrics. Top “Fear” investment recommendations: (1) Low vs. High labor cost companies; and (2) Strong vs. Weak Balance Sheet stocks.
  • Money flow represents a potential upside to our baseline forecast. Equity mutual fund and ETF inflows may benefit as investors lose money owning bonds. After years of active management underperformance and outflows, higher return dispersion will increase the alpha opportunity for investors skilled enough to capture it. Economic policy uncertainty and the later stages of the economic cycle are typically associated with higher stock return dispersion

And the details which, among other things, include a discussion of Alexis de Tocqueville:

  • 1. Earnings. S&P 500 operating EPS will grow by 10% to $116 in 2017 and adjusted EPS will increase by 5% to $123. Investors are excited about a prospective cut in corporate taxes that could boost adjusted EPS to perhaps $130, representing growth of 11%. However, our economists are skeptical that all the anticipated tax cuts will take place given the federal budget deficit constraints. Some tax reform will take place and upside exists to our baseline EPS forecast but it will be less than many investors now expect.
  • 2. Inflation and interest rates. In terms of inflation, core PCE will reach the Fed’s 2% objective by the end of next year. The Fed will hike interest rates next month and three additional times in 2017. Ten-year US Treasury yields will rise to 2.75%.
  • 3. Valuation. S&P 500 currently trades at 19x our forward top-down operating EPS estimate, 18x our forward top-down adjusted EPS and 17x our upside adjusted EPS scenario. The market trades at 17x forward consensus bottom-up adjusted EPS. US equities are highly valued relative to history on most metrics and versus inflation and interest rates. We forecast static valuation during the next 12 months.
  • 4. Path and target. We expect the S&P 500 index will rise to 2400 (+9%) by the end of 1Q as investors embrace the possibility that lower taxes will lead to positive EPS revisions. But less-than-expected tax cuts and higher inflation and interest rates will limit both upward EPS revisions and any P/E multiple expansion. S&P 500 will end next year at 2300, reflecting a price gain of 5% and a total return of 7% including dividends.
  • 5. Buybacks and dividends. Buybacks will rise by 30% as companies repatriate cash held overseas. Dividends will rise by 6% in 2017, above the 4% growth rate currently implied by the dividend swap market.
  • 6. “Hope” vs. “Fear” strategies: “Hope” will dominate during the first part of 2017 as Cyclicals beat Defensives. Firms with high domestic sales will outperform along with companies with high tax rates. “Fear” will dominate later in the year when investors focus on rising inflation and interest rates. Low labor cost and strong balance sheet firms will outperform.

And the charts:

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spastic_colon's picture

i'm genuinely curious as to what their next year S&P forecasts were in November's of 2006, 2007, 2008, 2009?

The Saint's picture
The Saint (not verified) spastic_colon Nov 30, 2016 12:13 PM

This is odd.  The day after Trump was elected Goldman said it didn't mean much to the S&P 500.

auricle's picture

The article also says rate hike in December on hold. 

Armed Resistance's picture

Let me summarize for you: The "market" will go wherever they want it to go, when they want it to go there, and for whatever "reason" they attach to the story that it went there. You are all just pawns in this game of financial slavery. 2+2=5

War Machine's picture

speaking of fear...

Erdogan: We're aiming to topple Assad

Putin: Erdy, you got some 'splainin' to do!!!

it is beyond obvious to me energy will spike before Xmas.

Got No Fly?

We could get for real war by Xmas...

then theres the reports of Egypt entering the fray and even 'warning' Turkey...

and ISIS still carefully avoids even mentioning the plight of their Sunni Arab Palestinian brothers...

terrified of the Israelis they say. not the US or Russia though.

make sense now?

Hohum's picture

Has Goldman been accurate in their past prognostications?  That would be an interesting article.

A. Boaty's picture

Hope and spare change.

bada boom's picture

Of course, Mnuchin is now going to be the treasure secretary.  They're being a bit modest, I say 3000. 

Rainman's picture

" The median stock trades at the 98th percentile of historical valuation based on an array of metrics."

       ^^^ THIS 

King Tut's picture
King Tut (not verified) Nov 30, 2016 11:35 AM

Sure, the Fed will hike with the 10Y creeping up/sarc

LawsofPhysics's picture

Why not, plenty of room for bank profits even with a small 0.25% hike on the money the primary dealer banks are getting from the Fed!!!!!!


Even better, these exact same banks are shorting and will profit when those rate go up!!

The only loser is the taxpayer!!!

same as it ever was.

LawsofPhysics's picture

Buy the dip, sell the rip!


same as it ever was, muppets.

small axe's picture

the world's most lucrative international crime cartel is always good for a laugh

To Hell In A Handbasket's picture

Government Sachs have another inside man. Have they been wrong in the long term yet? As they say, the best way to predict the future, is to control it. 

HalEPeno's picture

They could get any freshman econ 101 student to write this stuff.  In fact, they probably did tell an intern to crank out 1500 words for a release.  His boss scanned it on the way out the door for lunch, scrawled OK across the bottom, and now 50 million "investors" are pouring over Goldman's analysis.

silverer's picture

Was that Goldman, or Gamblers Anonymous that said that? Or both?

thismarketisrigged's picture




Manipulism's picture

As I said in former threats, Hope is not a strategy.


allamerican's picture

now is this 2400 thing going happen later today or tomorrow..

rates going ballistic, backs going make this happen.

like children, all of em..

Davidduke2000's picture

So far Trump is not showing that he will drain the swamp, he is adding more Crocs to it, he is continuing obama's fraud with the stock market and not showing any interest to audit the central bank and all departments that are dishing fake numbers, TOOOOOOOOOOOOOOO BBAAAAAAD he will be blame for the coming disaster. I really believed he can be different, but I see him scavenging old guards from previous administrations as it appears he has no clue where to start.

Keeping 800 jobs at a huge cost is no progress, it is the equivalent of the government paying these employees from the tax payers money with all the goodies he gave CARRIER.

I am still hopeful but with each day he is avoiding his allies and bringing old crap does not give me much hope.

jvetter713's picture

I'll have to wait for Gartman to get conformation.

ejmoosa's picture


And yet the FRB of Atlanta just sliced 1/3 of their GDP estimate away...


Go figure...

Quinvarius's picture

Looks like the rally is over.