GOLDMAN SACHS: The fastest-growing part of the stock market will surge to a record next year

  • Equity demand from ETFs will surge to a record in 2018, Goldman Sachs predicts.
  • Nonetheless, corporate demand for activities like buybacks will remain the biggest driver of stock demand next year.

Exchange-traded funds — which make up the most rapidly growing segment of the stock market — are showing no signs of slowing.

They will attract $US400 billion of investor demand in 2018, up 33% from this year, according to a Goldman Sachs forecast. To further boost the case for the so-called passive vehicles, Goldman estimates that actively-managed mutual funds will be net sellers of equities next year, shedding $US125 billion of exposure.

Screen Shot 2017 10 25 at 8.34.32 AMGoldman SachsEquity demand for ETFs and mutual funds will further diverge in 2018, says Goldman.

This divergence should come as no surprise to those following the meteoric rise of ETFs. The combined assets of US ETFs hit $US3.1 trillion in August, increasing roughly $US700 billion in a single year, according to Investment Company Institute data.

While ETFs will continue representing the biggest growth area in stocks, corporations will remain the biggest source of equity market demand. Share buybacks — a surefire way to drive stock appreciation even during lean times — will rise by 3% to $US590 billion in 2018, Goldman predicts.

But won’t expensive stock prices prohibit this? Goldman doesn’t think it will be a problem.

“Increased authorizations and high cash balances should more than offset headwinds to buybacks from high valuations,” a group of strategists led by Arjun Menon wrote in a client note.

Foreign investors will also drive equity demand next year, to the tune of $US100 billion, according to Goldman, which thinks it will be driven by stable US GDP growth and a flat US dollar.

But that’s not to say every possible source of stock demand will be as strong. In addition to mutual funds being net sellers, Goldman forecasts that pension funds will sell $US250 billion of equities in 2018 due to a continued rise in US 10-year Treasury yields.

Goldman’s forecasts are, of course, sensitive to external factors, most notably whatever happens with President Donald Trump’s proposed tax reform measures. In the event that key legislation passes, overall equity market demand should increase. The firm assigns a 65% probability of that happening.

A big part of that forecast is the massive windfall of cash that internationally exposed companies would enjoy in the event of a one-time repatriation tax holiday. An estimated $US250 billion would give US corporations a bigger surplus of capital to use on demand-boosting activities like the aforementioned buybacks.

Tax reform would, however, lower foreign investor interest in US stocks, another piece of the equity demand puzzle, as outlined in the chart above. Whether that would be offset by a surge in buybacks remains to be seen.

Lastly, another important element of Goldman’s overall forecast is the firm’s lack of concern over an equity bear market — or decline to 20% from recent highs. They think such a pullback is unlikely, paving the way for another robust year of net equity demand.

Get the latest Goldman Sachs stock price here.

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