GOLDMAN: 5 reasons the stock market will keep going lower

Volatility is back in markets after a dead-quiet summer.

And stock strategists at Goldman Sachs equity strategists expect that the next move for the S&P 500 will be down.

Goldman forecasts the benchmark index will finish the year at 2,100, about 1% lower than the 2,127 it closed at on Friday.

On Friday, the S&P 500 closed down more than 2%, the first time in 43 trading days the benchmark index closed with a gain or loss of more than 1%.

“‘Fat and flat’ is a catchy phrase but ‘sideways, down, and up’ more accurately describes the path of the US equity market during the past two months (sideways), our forecast through year-end (down 1%) and recovery during the subsequent nine months (up 4%),” said David Kostin, the chief US equity strategist, in a note on Sunday.

“We forecast the S&P 500 will follow a ‘fat and flat’ trajectory over the next 12 months and finish at 2,175, roughly 2% above the current level.”

In his note, Kostin outlines five reasons why the stock market’s direction will be down through year-end, and basically nowhere over the next year:

  • Goldman’s Extreme Sentiment Indicator is at an “extreme bullish” reading of 95 — a statistically significant trading signal that suggests the S&P 500 will fall 2% during the next month. After the chaos of the UK referendum in June, the index was a maximum bearish reading of 0, and the market gained 4% in the following weeks.
  • A rise in political uncertainty will result in a lower price-to-earnings multiple. Prediction markets assign a 70% chance of Hillary Clinton winning the election, but polls have recently tightened.
  • Recent US economic data including the ISM manufacturing and non-manufacturing surveys, have been disappointing.
  • This weak data point to downside risks to earnings-per-share forecasts.
  • Stock valuations remain extended. The S&P 500 trades at the 84th percentile of historical valuation, while the median stock is at the 98th percentile.

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