A November 19th report from Goldman Sachs Portfolio Strategy Research says there’s no major correction in the stock market at hand despite imminent Fed tightening. GS analysts David J. Kostin and colleagues are anticipating a “benign equity market reaction” to the looming Fed rate hike next year (first in six years).
The Goldman Sachs team believes the S&P 500 will continue to move up in the first half of 2015, but that P/E multiples will shrink to 16x in the second half of the year as the Fed begins the tightening cycle. Kostin et al remain relatively sanguine on the markets medium long-term, projecting a 6% annualized total return for the S&P 500 through 2018.
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Goldman Sachs Economics projects that the fed will pull the trigger on the first hike during the third quarter of 2015, and short-term rates will end 2015 at 0.6% while the 10-year yield will rise to at least 3%.
S&P 500: Solid fundamental story will keep bull market running for at least another couple of years
The Goldman Sachs analysts highlight that the S&P 500 currently trades at 17X forward earnings per share, a historically high P/E multiple and an increase of 60% in just three years. In 2015, GS anticipates that U.S. GDP will move up by 3.1%, S&P 500 sales will increase by 4%, gross margins will hold at around 9.1% and earnings will climb by around 5% to $122.
Three strategies for U.S. equities in 2015
Kostin et al. recommend three macro strategies for profitable investing in U.S. equities in 2015:
(1) Fundamental: Investors should look for U.S. stocks with strong (sand growing) domestic sales and avoid firms with above average European revenue exposure.
(2) Income: Investors should look for stocks that have a record of returning cash to shareholders via buybacks and dividends, and plans in place to do so in 2015. The GS analysts also recommend selling upside S&P 500 calls to enhance returns (ie, expect calls to expire worthless and you pocket the premium).
(3) Technical: On the technical side, one potentially profitable strategy Kostin and colleagues suggest is to buy stocks with low turnover to capture the illiquidity premium and sell stocks with a high ADV as a percent of free float.
As always, we warn readers caveat emptor