Goldman Sachs’s equity strategy team led by David Kostin are convinced that the S&P 500 will sink to 1,250 by the end of the year. This is down around 13 per cent from current levels.
And they blame the ‘fiscal cliff.’
“We assign a low probability that Congress addresses the ‘fiscal cliff’ in a benign fashion prior to year-end 2012,” writes David Kostin in a new note to clients. “The likelihood is perhaps as low as 1 in 3 depending on the election outcome. We expect it will be resolved in January but the uncertainty will prompt a P/E contraction towards year-end.”
In recent weeks, Goldman’s conversation with clients suggest that around 90 per cent of investors think Congress will soon reach a compromise on the impending ‘fiscal cliff.’
However, Goldman is not as optimistic.
Kostin thinks the ‘fiscal cliff’ debate could unfold like last year’s debt ceiling debate:
The precedential value of last year’s debt ceiling debate. Budget forecasts in the spring of 2011 clearly indicated that the federal debt ceiling would be reached by early August. All spring and early summer market participants assumed Congress would raise the borrowing limit before the ceiling was reached. Although Congress ultimately voted to raise the borrowing limit, a default on US Treasuries was only averted at the final hour. As the debate intensified, S&P 500 plunged by 17% between July 25th and August 8th. The messy resolution prompted Standard & Poor’s to strip the US of its AAA sovereign credit rating. Some investors believe last year’s debate was unique because many in the Congressional class of 2010 were elected under the “tea party” banner on the promise to limit the size of the national debt. However, the dynamics are actually similar because both debates involve date-specific deadlines that encourage brinksmanship.
Here’s a scary chart from Kostin’s note: