GOLDMAN: The Entire 2012 Rally Has Been Driven By Just One Thing

Earlier we relayed the latest call from Goldman’s David Kostin, that the market was still going to end the year much lower than where it is now.

Kostin’s argument is based on three headwinds: A decelerating economy, lower PE multiples, and weak earnings growth.

Anyway, one interesting chart in Kostin’s report is this one, which shows really that the whole rally is about PE multiples.

Click the chart to enlarge


Photo: Goldman Sachs

Now granted, there’s a lot of stuff baked into a trend of rising Forward PE, including the possibility that the market thinks earnings prospects are higher than what analysts are expecting.

And indeed, going back since the beginning of last year, it looks like changes in the market overall are the result of PE ratios.

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