Goldman Sachs Portfolio Strategy Research published their US Weekly Kickstart report on March 14. The report focused on “the drivers of the 5-year bull market and what must happen for it to continue.” Based on their proprietary models, GS Analysts David J. Kostin et al credit a rebound in corporate profits of 59% of the current mega-rally, P/E multiple expansion for another 25% and anticipated improvement in EPS growth for the final 16%.

Goldman Sachs S&P 500 12-month projections

The Goldman Sachs analysts are only modestly optimistic about equities over the next few quarters as they project that the S&P 500 (INDEXSP:.INX) will trade at 1900 in 12 months. That is just a 2.9% increase from today’s levels.

Kostin et al. provide more color on their S&P 500 earnings forecasts below. “Our top-down EPS forecasts of $116 and $125 for 2014 and 2015 both reflect 8% growth. Bottom-up consensus forecasts a 10% increase in 2014 to $118, and 11% increase in 2015 to $131.”

Sector analysis

The GS report also highlights the fact that just five sectors accounted for three-quarters of the current five-year bull run. “In terms of sectors, Financials and Information Technology contributed about 40% of the rally followed by Consumer Discretionary, Health Care, and Industrials. Together these five sectors accounted for more than 75% of the bull market.”

S&P 500 five year rally

GS makes the case for slow growth

The central argument of the GS analysts is that equities are currently fairly valued to overvalued, so there are few catalysts for appreciation in stock prices. “In order for S&P 500 to climb higher, (a) the level of profits, (b) the expected forward earnings growth rate, and/or (c) the P/E multiple must change. Given the high starting point of all three metrics, it is hard to identify any one of these that will climb significantly during the coming year.”

S&P 500 forward PE ratios

Follow the money flow and buybacks

The one other factor that Kostin and colleagues mention as a possible wildcard to help stock prices is increased money flow into stocks. They suggest focusing part of your portfolio on stocks with high buyback yields: “The largest demand for shares stems from corporate buybacks. We recommend our 50-stock sector-neutral Buyback basket comprised of firms with the highest buyback yields. At 14.1x, the basket trades two P/E points less than S&P 500 (INDEXSP:.INX).”