We have discussed at length the slowing forward expectations for the next 12 months EPS of the S&P 500 and while every long-only equity strategist enjoys the same talking points of record profits, margins, global growth, and cash-on-the-sidelines, it seems Goldman is increasingly skewing back to a sense of reality. At cycle turns, analysts are always the 'most' wrong with their Birinyi-like extrapolations but a cautious outlook with expectations of a de minimus equity market over the next 12 months leaves Goldman rightly concerned that margins are peaking as consensus sees them growing and multiples will drop as policies remain volatile.
An S&P 500 target of 1200 for Dec11 and 1300 for Dec12 and a focus on quality, dividends, and defensives doesn't sound like the high beta momo double-bogey performance-chasing we have seen in the last few weeks is sustainable. Furthermore, their perspective on the October rally is it reflects a drop in the cost of equity as opposed to better fundamentals.
In one of the most complete (and truthy) discussions we have seen recently (and expanding on the note we discussed in late September), GS notes forward EPS reductions, high correlations, fund under-performance, and basic fundamentals around the business cycle - as well as indicating growing areas of concern.
A topic often discussed here recently is the accelerating drop in consensus EPS for next year that seems to be ignored by all and every top-down strategist's projections for equity exposure.
P/E multiples are another side of the valuation coin and given uncertainties, GS is hardly positive:
And finally, some perspective on the huge October rally, that GS believes is more reflective of the low cost of equity than any improvement in fundamentals - and given the performance post-early October, WACCs have retraced.
The entire slide-pack is presented below: