David Kostin, chief U.S. equity strategist at Goldman Sachs Group, Inc., told CNBC that his team thinks the stock market is going nowhere for the year ahead. (Source: CNBC, May 19, 2015.)
Slow Growth, Future Rate Hike, and Corporate Buybacks
Goldman Sachs believes that the S&P 500 index will reach 2,150 in the next few months and then retrace to 2,100 by the end of the year. The 12-month estimate for the S&P 500 is 2,125.
On Tuesday, May 19, the S&P 500 index was hovering around 2,130—which doesn’t leave much room for gains.
Two things prompted the not-so-optimistic forecast by the giant investment ban: slow economic growth and a possible interest rate hike.
The U.S. economy grew a dismal 0.2% in the first quarter of 2015. Inventories are piling up but not selling. Job growth was limited. The global economy is not helping either. The growth prospects for U.S. businesses are not bright.
The current level of the stock market is partly fueled by the low interest rates that the Federal Reserve has been keeping in place since 2009. When the return was too low for saving money, people and institutions threw money into the stock market. Should the Fed increase interest rates in September, many believe the stock market will cool down.
There is also growing concern with valuations. The average S&P 500 stock has a price-to-earnings ratio of 18.2. Ratios this high are in the 99th percentile in history. High valuations will put constraints on upward movement.
Goldman Sachs is not the only bank that has finally woken up to the truth. Last Friday, David Bianco, chief U.S. equity strategist at Deutsche Bank warned CNBC that it will be a “dangerous summer” for the stocks. (Source: CNBC, May 15, 2015.)
What We’ve Been Saying All Along
Wall Street’s warning should not be a surprise to fellow readers of Profit Confidential. We have been warning readers over and over again on how the stock market is overvalued. Michael Lombardi recently warned that the S&P 500 is overpriced by 64% according to the CAPE multiple. In another article, Lombardi commented particularly on the behavior of stock buybacks as a method to boost corporate earnings.
While the mainstream might be shocked at Goldman Sachs’ forecast, this is nothing new. Moreover, the higher the stock market goes, the more dangerous it becomes.