Goldman Sachs predicts on a tactical basis that the S&P 500 will decline during the next month, while strategically the potential for upside exists with 5% earnings growth in 2015.
David J. Kostin and team at Goldman Sachs in their US Equity Views report titled: “Prospects for US stocks in 2015: A tactical and strategic view” anticipates IT, energy and telecom services will outperform the S&P 500 over a 12-month horizon.
S&P 500 at 2100 by end-2015
The Goldman Sachs analysts point out that their U.S. equity market Sentiment Indicator currently stands at a maximum possible reading of 100, indicating the S&P 500 has near-term downside risk during the next six weeks. Though on a tactical basis, S&P 500 indicates downside, strategically the analysts anticipate that 3% GDP growth will drive 5% earnings growth in 2015, and hence upside exists if crude prices remain low.
Kostin et al anticipate S&P 50 will end the year at 2100 and deliver a total return of 4%, including dividends. The analysts point out that though the market will climb to a high of 2150 around mid-year, P/E will likely contract, thanks to Fed tightening in September for the first time in nine years.
Taking a slightly longer view, the Goldman Sachs analysts forecast the S&P 500 will generate a 6% annualized return over the next four years. As can be seen from the following table, the analysts anticipate earnings will rise, though the forward P/E multiple will contract from the current 16.9x to 15.3x at the end of 2018, as the interest rate environment normalizes:
Rising interest rates could trim S&P 500 gain
Kostin and colleagues point out that median stock in S&P 500 currently trades at nearly 18x forward earnings, a multiple seen only 2% of the time since 1976. The analysts note falling interest rates and a 58% P/E multiple expansion since 2011 will start to reverse in 2015:
The Goldman Sachs analysts point out that their earnings model indicates lower oil prices will have positive impact on S&P 500 EPS. They attribute this correlation to a lower oil price having a positive impact on GDP growth.
Turning their focus towards individual sectors, the Goldman Sachs analysts recommend investors overweight in Information Technology, Energy, and Telecom Services and Underweight Consumer Discretionary, Industrials, and Materials. Considering the analysts forecast a modest 4% return for the index in 2015, and they anticipate S&P 500 return dispersion will remain low, their recommended sector tilts are only 100 bp:
In terms of themes, the Goldman Sachs analysts’ recommendation relate to fundamentals (strong U.S. growth), income (stocks returning cash to investors), technical (low turnover), risk (stocks with high prospective Sharpe Ratios) and low valuation (given high market multiple). The following table captures a list of 36 stocks that are constituents of two or more of the analysts’ highlighted thematic baskets: