Count Goldman Sachs as one of the S&P 500 bulls. Although not exactly at the level of Jeremy Siegel, analysts from Goldman are out with a new report which predicts the S&P 500 to hit 2100 in 2015. They expect a rapid increase in dividends to keep the yield on the S&P 500 at around 2% and for earnings to grow to $124 per share by 2015. Below is the full report from Goldman which is hot off the press.
Goldman Sachs on S&P 500 forecast
Our positive 2013 outlook for S&P 500 has played out much faster than we expected. Our earnings estimates remain unchanged but we raise our dividend estimates and index return forecasts for 2013 through 2015. We expect S&P 500 will rise by 5% to 1750 by year-end 2013, advance by 9% to 1900 in 2014, and climb by 10% to 2100 in 2015. Our 2013 return implies a year-end P/E of 15.0x, a one multiple point premium to our fair-value estimate. We forecast dividends will rise by 30% during next two years. Dividend yield is likely to stay around 2%, in line with the 20-year average.
End of US economic stagnation suggests S&P 500 P/E expansion
In advanced economies, P/E multiples expanded by an average of 15% during the year before GDP growth returned to trend. Our year-end 2013 implied forward P/E of 15x would represent a 13% increase vs. 2012.
Our S&P 500 forecast reflects a one P/E multiple point premium
Reasons for P/E expansion include confidence in the medium-term outlook for US economic growth and the wide gap between equity and persistently low bond yields that we assume will be closed more by stocks than bonds.
We expect dividends will rise by 30% between 2013 and 2015
We forecast dividend growth of 11% in both 2013 and 2014 and 9% in 2015. Our EPS forecasts remain unchanged but we have lifted our payout ratio assumptions after surprisingly large 1Q year/year dividend growth of 12%.
Further multiple expansion possible if rates stay low, growth improves
If interest rates stay low despite better growth then upside to S&P 500 may be greater than we currently forecast. Monetary easing by Fed, BOJ, and ECB keeps sovereign yields low and would support this potential outcome.
We are raising our S&P 500 dividend estimates and index return forecasts for 2013 through 2015. We expect S&P 500 index will rise by 5% from the current level to 1750 by year-end 2013, advance by 9% to 1900 in 2014, and climb by 10% to 2100 in 2015. We expect a 3-month return of 2% to 1700 and a 10% return during next 12 months to 1825. Our previous 2013-2015 year-end targets were 1625, 1775, and 1900, respectively.
1. We expect S&P 500 dividends will rise by roughly 30% between 2013 and 2015. We forecast dividend growth of nearly 11% in both 2013 and 2014 and about 9% in 2015. Our earnings forecasts remain unchanged but we have boosted our payout ratio assumptions. While 1Q year/year earnings growth of 6% was in line with expectations, dividends surged by 12% led by surprisingly large hikes from Financials and Consumer Discretionary firms. Our dividend forecasts are now in line with the dividend swap market for 2013 and 2014 but slightly above the implied levels for 2015 through 2022. Together our dividend and price target forecasts imply an S&P 500 annualized dividend yield of 2.2% from 2013 to 2015.
2. Our US Economists forecast above-trend growth in 2014 for the first time in six years. In advanced economies, the final year of economic stagnation before GDP growth exceeded trend has been associated with P/E multiple expansions averaging 15%. Our year-end 2013 forward P/E of 15x would be 14% above last year’s 13.2x. The S&P 500 currently trades at 14.6x bottom-up consensus and 15.0x our top-down NTM EPS estimates.
3. The macro investment environment supports an above-average S&P 500 valuation. Our standard valuation approaches point to a P/E multiple of 14x forward earnings. However, our revised forecast estimates an S&P 500 P/E multiple of 15x-16x during the next three years that is above the long-term average but in line with the post-1990 experience. The S&P 500 forward P/E multiple has averaged 12.9x since 1973 but 15.3x since 1990.
Full report below:
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