Last week the S&P 500 hit the 1625 price target that Goldman strategist David Kostin had predicted for the end of 2013. That’s how amazing this year has already been.
So what’s next? Even more gains, says Kostin.
In this week’s Weekly Kickstart note he writes:
S&P 500 rose 1% this week and now stands essentially at our year-end 2013 price target of 1625. The 14% rally in 2013 has been driven almost entirely by P/E multiple expansion. S&P 500 now trades at 14.8x our forward 12-month earnings estimate up from 13.2x at the start of 2013. The market trades 14.4x consensus bottom-up EPS estimates. For context, the 35-year average forward P/E ratio equals 12.9x and the 10-year average equals 14.3x.
The market has risen faster than we expected in 2013 but we still forecast considerable upside to the S&P 500 during the next few years. Last month Goldman Sachs global equity strategists introduced 2014 and 2015 price targets for the world’s major equity markets. We forecast the S&P 500 will rise to 1775 by year-end 2014 (+9% from today) and reach 1900 by the end of 2015 (+17%). Those prospective returns will be driven by earnings growth given we expect a stable P/E multiple of roughly 14.5x.
And even if earnings don’t grow much, there’s still a way for stocks to power higher:
Under the right circumstances, low real bond yields and improving US economic growth could also justify significantly higher valuations. Goldman Sachs Economics base case forecast remains that 10-year US Treasury yields rise to 2.5% at year-end 2013 and climb to 3.0% by end 2014 and 3.25% by end of 2015 from 1.8% today. However, if the bond market’s forecast for negative real 10-year yields through 2015 and our expectation that US real GDP growth exceeds 3% in both 2014 and 2015 prove accurate, then the P/E multiple could rise notably higher than our 14.5x forecast.