Goldman Sachs equity strategist David Kostin is out with his 2015 outlook for the S&P 500.
Kostin’s price target: 2,100.
This equates to a roughly 5% return for the benchmark stock index, as the firm said it expects above-trend economic growth which suggests “below-average return dispersion and volatility and a year of disappointing returns for active fund managers.”
Here’s Kostin’s broad overview for the economy in 2015:
“We forecast US stocks will deliver a modest total return of 5% in 2015, in line with profit growth. The US economy will expand at a brisk pace. Corporations will boost sales and keep margins elevated allowing managements to both invest for growth and return cash to shareholders via buybacks and dividends. Investors will cheer these positive fundamental developments.”
But, despite these positive economic developments, Kostin sees volatility in the stock market remaining low, keeping stock return dispersion, or how widely spread gains and losses will be spread across the universe of stocks, low in 2015.
Kostin says that mutual funds and hedge funds typically lag the S&P 500 during low dispersion regimes.
Kostin adds that the multiple expansion phase of the current bull market, or when stock prices rose as investors were comfortable paying more, on average, for additional earnings per share, ended in 2013, with this year’s ~10% return for the S&P 500 just keeping pace with earnings growth.
In 2015, Kostin expects stocks to continue their upward trajectory during the first half of the year, with price-to-earnings ratios, or multiples, contracting in the second half of the year as the Fed begins to raise interest rates. Goldman Sachs’ economics team expects the Fed’s first rate hike to come in the third quarter of next year.
The reaction to these rate hikes, however, is expected to be benign, and Kostin acknowledges that this might be a minority view.
“Many fund managers disagree with our view and believe higher equity volatility will accompany higher interest rates,” Kostin writes. “They argue that once the Fed begins to hike uncertainty will abound regarding the pace of further tightening and volatility will jump. Our response to those arguments is that the interest rate swaption market implies a relatively steady and shallow path of future hikes with volatility remaining quiescent.”
And so while 2015 could be a transformative year for the market if interest rate hikes from the Fed really do materialise, Kostin expects the market to take these increases in stride.
Here’s the chart of the Goldman’s outlook for the S&P 500.
And the outlook for interest rates.