Goldman Sachs Reiterates S&P 500 1750 PT; Fed Model Implies More Upside

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Ahead of the official start of the earnings season tomorrow with results from Alcoa, Goldman Sachs is out with a new report on GDP and S&P 500 forecasts. The estimates from David J. Kostin are virtually unchanged from a recent report issued by the firm, however, according to the latest data, the S&P 500 (.INX) can reach its price target of 1750 using lower multiples due to higher anticipated earnings.. Goldman also includes their 23 ‘muppet stocks’. Below is an excerpt followed by the full report.

S&P 500

Goldman Sachs S&P 500 Forecast

Market: We forecast S&P 500 will rise by roughly 8% during the second-half of 2013, another 9% in 2014, and 11% in 2015. The key driver of higher equity prices will be earnings growth which we expect will reach $108 in 2013, and rise to $116, $124, and $131 in 2014, 2015, and 2016, respectively (see Exhibit 1). Our earnings model forecasts modest revenue growth of 5% and net margins of 8.9% in 2013. Our S&P 500 index target implies a slight P/E multiple expansion to 15x forward earnings at year-end 2013 from the current 14x.

Sectors: Cyclical sectors such as Financials and Industrials should pace the overall market. We expect defensive sectors such as Consumer Staples and Health Care that trade at historically high valuations will lag. Ten-year US Treasury yields have jumped by roughly 100 bp to 2.7% since early May. We expect rates will remain at this level through year-end. The slope of the yield curve has steepened by a similar amount given Fed funds are pinned at zero. A steep yield curve and accelerating GDP growth have historically been associated with strong performance of certain micro equity factors including low valuation and small-cap. Leading sectors include Information Technology, Industrials, and Materials.

Themes: Thematically, stocks with high prospective Sharpe ratios and companies with a combination of high dividend yield and growth should outperform. Our high Sharpe Ratio basket re-balanced semi-annually on a sector-neutral basis has a 71% outperformance hit-rate versus the S&P 500 since 1999. The average six-month excess return equals 460 bp. The strategy generated a better information ratio than most large-cap core mutual funds. We recommend sector-neutral baskets of S&P 500 stocks constructed around the risk-adjusted return and dividend themes (see Bloomberg tickers <GSTHSHRP> and <GSTHDIVG>).

Stocks: We believe stocks with several of our preferred investment characteristics will outperform the S&P 500 during the next six months. These attributes currently include high Sharpe Ratios, dividend yield and growth, rising return on equity, domestic revenue exposure, and high hedge fund ownership. Exhibit 27 contains a list of 23 stocks that meet several of these criteria and are also Buy-rated by Goldman Sachs equity research analysts. Examples include: ALL, AMT, C, EBAY, PFE, PM, SPG, V and WYN.

S&amp;P 500 Goldman Sachs by

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