The June 19th US Weekly Kickstart from Goldman Sachs Portfolio Equity Research argues that what you see is what you get in terms of U.S. stock market indices in 2015, and the firm does not expect things to change appreciably in the second half of the year.
Goldman Sachs analyst David J. Kostin and colleagues summarize their point of view in the introduction of the report: “Both domestic and foreign investors favored foreign equities over US stocks in 2015 as the S&P 500 underperformed foreign indices on both a local currency and a USD basis. There is little to indicate a change to this trend during the next year given our forecasts of further US dollar strengthening and higher equity returns outside the US.”
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Weekly S&P 500 performance
Of note, in US markets, the S&P 500 index moved up 0.6% last week. Utilities was the best-performing sector at +1.6%, while Energy was the worst-performing sector at -0.7%. Kostin et al. highlight that they anticipate the S&P 500 will not go much of anywhere in the next 12 months, and end up at 2125, for a gain of just +0.2%.
In general, investors seemed to view news from the Fed this week as dovish. The GS report notes: “The FOMC statement, the revised “dot plot” in the Summary of Economic Projections (SEP) and the press conference by Chair Yellen all point to an initial hike in the fed funds rate during 2H 2015. Our US economics team now believes the first hike will take place in December rather than September. Should the employment data and inflation indicators exhibit continued strength during the next few months a hike in September is certainly possible.”
Not surprisingly, U.S. stocks rallied and the dollar slipped on the Fed news. The Goldman Sachs team projects that the S&P 500 will hit 2150 around mid-year and then fade 2100 by early next year as the rate hikes start up and the P/E multiple begins to come down.
High demand for foreign stocks, US markets ignored
Kostin and colleagues point out that domestic and foreign investors have preferred foreign equities over U.S. stocks so far in 2015. The S&P 500 index is up around 4% year to date, not a bad performance, but still underperforming foreign markets on both a local currency and a US dollar basis. Moreover, recent equity flows suggest domestic equity investors bought shares in foreign markets, “while foreign investors ignored the US equity market.”
The report also notes demand for foreign equities has been very strong in 2015 relative to domestic equity flows. Global mutual fund and ETF purchases added up to $149 billion so far this year, while domestic equity funds saw outflows of $63 billion. U.S.Treasury TIC data also shows net foreign equity buys by U.S. investors came to $53 billion in the first four months of 2015. Of note, demand was greatest in Europe and Asia ex-Japan.