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.