Goldman: Four Ways to Find Value in a Fairly Valued Market

From David Kostin’s GS Portfolio Strategy Research note this morning:

Target: S&P 500 will rise 6% and reach 1900 at year-end 2014

Our forecast return reflects 8% growth in EPS to $116 coupled with an

essentially flat forward P/E multiple near 15x. Looking further ahead,

extended growth in sales, earnings, and the economy will lift the P/E to 16x

and S&P 500 will reach 2100 by year-end 2015 and 2200 by year-end 2016.


Path: Drawdown risk rising after 40% rally with no correction

S&P 500 has soared 26% YTD. The median expected drawdown equals 6%

in the next three months and 11% during the next 12 months. Drawdowns

of these magnitudes from the current level would equate to 1700 and 1600.

We estimate a 67% probability of a 10% drawdown at some point in 2014.


Fundamentals: Improving US economy and rising earnings

US GDP growth will accelerate to 3% in 2014. Fed taper will start in March.

Buybacks and dividends will grow by 25% to $960 billion and account for

45% of cash usage by S&P 500 firms in 2014, the highest share since 2007.


Four strategies for a stock market trading at fair value

(1) Russell 1000 Growth will outperform Russell 1000 Value as earnings

growth decelerates; (2) Firms with low recent capex but high ROIC that will

grow investment spending in 2014 are positioned for sustainable growth;

(3) Firms with high buyback yields will benefit as cash returns to investors;

(4) Firms with high degree of operating leverage will benefit most from

acceleration in sales growth.


Goldman Sachs

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