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Goldman Sachs’ equity strategy team led by David Kostin just published its 2013 U.S. Equity Outlook Report.And it’s bullish.
Here’s how Kostin’s team sees the S&P 500 unfolding next year:
Valuation: 12-month target of 1575 reflects 12% potential return
Our 3-month, 6-month, and 12-month forecasts are 1450, 1500, and 1575. We use six valuation approaches including DDM, uncertainty-based P/E multiple, cyclically-adjusted P/E multiple, price/book and ROE relationship.
“S&P 500 sales, which are measured in nominal terms, will rise by 4.4% in 2013 and 4.7% in 2014,” wrote Kostin. “We forecast net margins will remain static as they have for the past 18 months, hovering in the 8.8%-9.0% band through the end of 2014. Given this environment, S&P 500 EPS will rise from $100 in 2012 to $107 in 2013 and $114 in 2014.”
Kostin first launched that 1,575 price target last month. But this massive new 50-page report includes much more detail on strategy.
Strategies to capture growth: market, sectors, stocks
(1) Stocks will outperform Treasuries;
(2) Equities will beat credit returns, although not on a risk-adjusted basis;
(3) Cyclical sectors will beat defensive sectors (Materials, Industrials, Information Technology will outperform Consumer Staples, Telecom, and Health Care);
(4) Double Sharpe Ratio stocks offer both high risk-adjusted earnings growth and prospective returns; and
(5) Stocks with high BRICs sales exposure will beat domestic-facing firms.
Here’s what would make Goldman more or less bullish than it is:
The greatest positive catalyst that might lead us to raise our index forecast would be a “grand bargain” addressing the nation’s long-term fiscal imbalances along the lines of the Simpson-Bowles report. It would spark a P/E multiple expansion and a higher target. Downside risks include political discord in US or Europe, the effectiveness of the Fed’s QE policy, higher US Treasury yields, and the sustainability of record high profit margins.
Here are the firm’s 2013 total returns expectations for four big asset classes:
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Goldman’s 2013 investment guide comes days after Morgan Stanley made its 2013 stock market call.