Goldman Sachs: Prepare for Extreme Market Volatility
Investors have been waiting for a year for Goldman's equity strategist to revise his market forecast. Finally, David Kostin released that revision on Friday.
Interestingly enough, the forecast leaves the year end level unchanged at a level over 200 points lower in the S&P cash – representing an assumption of a 15% decline.
These sentiments suggest that investors should expect similar conditions as those we experienced in August of 2011. The fiscal cliff – which would otherwise deduct 5% GDP growth – and the never-ending debt ceiling debate signal a coming market crash.
However, if policy-makers are able to formulate some sort of solution, Kostin believes we'll experience a major upside, with a six month target of 1450 and the S&P ending at a target of 1575, “calculated by applying a 13.9 multiple to the firm's EPS forecast of 114.”
Tyler Durden at Zero Hedge elaborates:
Of course, this being bizarro Goldman Sachs it means expect a continued surge into year end, then prolonged fizzle into the new year. Why? Because there is not a snowball's chance in hell the consolidated S&P earnings can grow at this rate, especially not if the Fiscal Cliff compromise is one that does take away more than 1% of GDP thus offsetting all the "benefit" from QE.
Simply said, companies who have already eliminated all the fat, and most of the muscle, and are desperate for revenue growth to generate incremental EPS increase, have not invested in CapEx at nearly the rate needed to maintain revenue growth (see How The Fed's Visible Hand Is Forcing Corporate Cash Mismanagement) having dumped all the cash instead in such short-sighted initiatives as dividends and buybacks. Also, recalling that revenues are now outright declining on a year over year basis, and one can see why anyone assuming a 14% increase in earnings in one year, is merely doing all they can to make the work of their flow desk easier.
The general message Kostin asserted in his statement was that equities are a lucrative long-term option for investors despite the fact that there are some serious near-term risks looming as we come close to the edge of the fiscal cliff.
Stuart Eizenstat, former undersecretary of State and deputy secretary of the Treasury under President Bill Clinton, also sees a “very strong” recovery for the U.S in 2013... but why?
According to Kostin, the FOMC's open-ended easing program allows investors to look forward confidently and focus on corporate fundamentals in lieu of the stagnant economy. He believes QE has successfully reduced investor risk when it comes to equities although it has yet to improve any GDP growth expectations.
Due to the lingering uncertainty and loose fiscal policies, Goldman's year-end 2012 price target rests at 1250.
While they anticipate an extreme downside in the near-term, Goldman also expects a recovery in 2013, before surging even higher in 2014.
Add a Comment (Pro Members Only)
More like this...10 Stock Market Secrets Your Broker Won't Tell You
The stock market is a giant game of chance, but you can't win if you don't know the rules...
Marc Faber Laughs Maniacally, Predicts Massive Market Crash in the Fall
"We could easily drop below 1000 on the S&P..."
Warning: A Massive Stock Market Crash is Imminent
The month of October is synonymous with stock market crashes...