Goldman Sach’s David Kostin is not enthusiastic about the stock market right now.
The chief US equity strategist for Goldman said in a note to clients on Sunday that stock markets around the world are not going to offer any serious gains for the foreseeable future.
“In the next three-months we expect negative price returns in Asia (-3%), Japan (-6%), US (-10%) and Europe (-11%),” said Kostin. “This week our global strategists lowered equities to underweight in a 3-month asset allocation model given that stocks trade near the upper end of their ‘fat and flat’ range.”
On Monday, the Goldman Sachs’ strategy team downgraded stocks to “Underweight” on a 3-month basis, essentially saying to sell equities.
“Until the growth situation improves, we are not that constructive on equities, particularly after this type of rally and amid continuing concerns about the sustainability of stimulus-led growth in China, global policy uncertainty (and in Europe in particular), dovish central bank expectations, and heightened prospects of unknown shocks (e.g. Turkey recently),” wrote strategist Christian Mueller-Glissmann in a note on the decision.
The biggest reason for the lacklustre returns, according to Kostin, is that stocks are simply expensive.
“The S&P 500 (17.2x) and STOXX 600 (14.9x) both trade at forward [price-to-earnings ratios] one standard deviation or more above their 10-year averages,” wrote Kostin.
“MXAPJ (13.5x) trades at an above-average multiple relative to its history while TOPIX (13.6x) trades in line with the past decade.”
Kostin also notes that the current median forward P/E for a S&P 500 stock is in the 98th percentile of its range dating back to 1976. In other words, everything is pricey.
The high P/E ratios has Kostin convinced that there will be a drop in the S&P 500 of at least 5% in the coming months. Afterwards, he predicts earnings will improve allowing the market to make some gains, though as he puts it there will be ‘no medal winner’ in the low-return environment.
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