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Wednesday, November 22, 2017 2:12:18 PM
Goldman: ‘Rational exuberance’ to drive stock market in 2018
By: MarketWatch | November 22, 2017
Forecasts S&P 500 at 2,900 by the end of next year
The meteoric rise of stock prices in the late 1990s is now widely considered to be the result of irrational exuberance among investors, but the current stock market rally is nothing like that, according to Goldman Sachs.
Then, price to earnings ratios on the S&P 500 SPX, -0.04% expanded to absurd levels as investors piled into technology stocks believing that the internet would change the world, only to see more than half of their portfolio to be wiped out during the subsequent crash.
But this time it is different, according to Goldman Sachs analysts led by David Kostin, who forecast Tuesday the market will experience “rational exuberance” over the next three years, with prices and valuations all supported by earnings growth.
“The current equity market valuation is certainly stretched in historical terms but it does not appear unreasonable based on the high level of corporate profitability,” wrote David Kostin and his team in the latest note.
In a chart below they compare the S&P 500 during the bull market in 1990s with the current bull market beginning 2009.
Their calculation of projected earnings, in large part thanks to a potential tax cut, and a modest multiple expansion takes the market on measured path higher over the next three years. Their target for the S&P 500 at the end of 2018 is 2,850—or about a 10% rise from current levels. They expect the index to rise to 3,000 by the end of 2019 and 3,100 by the end of 2020.
To be classified as “irrational exuberance” the stock market would have to double over the next three years, they said.
“We would deem it “irrational exuberance” if the S&P 500 during the next three years followed the exponential trajectory of stocks in the late 1990s. In that situation, the S&P 500 would trade at 5,300 by year-end 2020 (a 105% rise from today),” they wrote.
Forecasting short-term returns is a difficult business. In fact, studies of market returns suggest there is no solid lasting relationship between projected earnings growth and short-term returns, because people choose multiples they want to pay for future earnings based on sentiment.
There are a few differences between this bull market and the one in the 1990s. Among them, low volatility, both implied and realized.
The only thing that threatens the low-volatility regime is the failure to pass the tax bill. “If tax reform fails, S&P 500 will fall near-term by 5% to 2450,” Goldman said.
Earnings growth estimates, which Goldman raised, are predicated on the passing of the tax cut bill, higher GDP growth and higher oil prices.
Assuming the tax bill is passed in the first quarter of 2018, there will be winners and losers among various sectors.
Among the companies that would likely benefit the least from a tax cut are technology and health-care, as their effective tax rates are already the lowest. Goldman specifically recommends trimming technology shares in the portfolio.
“Although tech has the highest expected sales growth and profit margins, it also has the highest risk from tax reform, valuation, and government regulation,” they said.
Repatriation of overseas cash is also unlikely to boost earnings, with the impact expected to be about $1 to $3 a share.
But overall, growth will continue to outperform value in 2018, according to Goldman.
But not all growth is the same. Companies that will benefit the most are the ones with secular growth story—not overly expensive and can see their revenues rise by 10%. Companies that are consistently investing in capital expenditure and R&D as well as those that are targets of potential merger and acquisition will see the highest returns, they said.
https://www.marketwatch.com/story/goldman-rational-exuberance-to-drive-stock-market-in-2018-2017-11-21
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https://investorshub.advfn.com/Market-Direction-and-Trends-26249/
By: MarketWatch | November 22, 2017
Forecasts S&P 500 at 2,900 by the end of next year
The meteoric rise of stock prices in the late 1990s is now widely considered to be the result of irrational exuberance among investors, but the current stock market rally is nothing like that, according to Goldman Sachs.
Then, price to earnings ratios on the S&P 500 SPX, -0.04% expanded to absurd levels as investors piled into technology stocks believing that the internet would change the world, only to see more than half of their portfolio to be wiped out during the subsequent crash.
But this time it is different, according to Goldman Sachs analysts led by David Kostin, who forecast Tuesday the market will experience “rational exuberance” over the next three years, with prices and valuations all supported by earnings growth.
“The current equity market valuation is certainly stretched in historical terms but it does not appear unreasonable based on the high level of corporate profitability,” wrote David Kostin and his team in the latest note.
In a chart below they compare the S&P 500 during the bull market in 1990s with the current bull market beginning 2009.
Their calculation of projected earnings, in large part thanks to a potential tax cut, and a modest multiple expansion takes the market on measured path higher over the next three years. Their target for the S&P 500 at the end of 2018 is 2,850—or about a 10% rise from current levels. They expect the index to rise to 3,000 by the end of 2019 and 3,100 by the end of 2020.
To be classified as “irrational exuberance” the stock market would have to double over the next three years, they said.
“We would deem it “irrational exuberance” if the S&P 500 during the next three years followed the exponential trajectory of stocks in the late 1990s. In that situation, the S&P 500 would trade at 5,300 by year-end 2020 (a 105% rise from today),” they wrote.
Forecasting short-term returns is a difficult business. In fact, studies of market returns suggest there is no solid lasting relationship between projected earnings growth and short-term returns, because people choose multiples they want to pay for future earnings based on sentiment.
There are a few differences between this bull market and the one in the 1990s. Among them, low volatility, both implied and realized.
The only thing that threatens the low-volatility regime is the failure to pass the tax bill. “If tax reform fails, S&P 500 will fall near-term by 5% to 2450,” Goldman said.
Earnings growth estimates, which Goldman raised, are predicated on the passing of the tax cut bill, higher GDP growth and higher oil prices.
Assuming the tax bill is passed in the first quarter of 2018, there will be winners and losers among various sectors.
Among the companies that would likely benefit the least from a tax cut are technology and health-care, as their effective tax rates are already the lowest. Goldman specifically recommends trimming technology shares in the portfolio.
“Although tech has the highest expected sales growth and profit margins, it also has the highest risk from tax reform, valuation, and government regulation,” they said.
Repatriation of overseas cash is also unlikely to boost earnings, with the impact expected to be about $1 to $3 a share.
But overall, growth will continue to outperform value in 2018, according to Goldman.
But not all growth is the same. Companies that will benefit the most are the ones with secular growth story—not overly expensive and can see their revenues rise by 10%. Companies that are consistently investing in capital expenditure and R&D as well as those that are targets of potential merger and acquisition will see the highest returns, they said.
https://www.marketwatch.com/story/goldman-rational-exuberance-to-drive-stock-market-in-2018-2017-11-21
• DiscoverGold
****************************************
*** For Market Direction and Trends visit our board:
https://investorshub.advfn.com/Market-Direction-and-Trends-26249/
Information posted to this board is not meant to suggest any specific action, but to point out the technical signs that can help our readers make their own specific decisions. Your Due Dilegence is a must!
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