Anyone expecting a surge in market volatility as Mario Draghi recently warned, will be disappointed to read Goldman's latest forecast which not only does not budge on its year end S&P forecast of 2100, but predicts that the market will be flat as a pancake for the balance of the year.
Here is Goldman's assessment of why one may as well take the rest of the year off:
The most likely path of the US stock market during the next six months is sideways. We forecast the S&P 500 index will end 2015 at 2100, roughly unchanged from the current level. S&P 500 delivered a compound annual price return of 18% during the past three years and 13% during the past five years, both well above the long-term average annual return of 5%. Mean reversion is a powerful force. Put simply, “flat is the new up” when it comes to the future path of the US stock market.
And here are Goldman's four reasons why the bank expects the S&P 500 will end 2015 unchanged from the current level: High starting valuation, negligible earnings growth, outflow from domestic equity mutual funds and ETFs, and modest economic growth. Offsetting these headwinds to a higher market, buybacks remain robust and serve as a pillar of support in the current environment.
Finally, Goldman adds that its "sentiment indicator stands at 0, implying a tactical rally is likely during the next month." So... expect a plunge?
Here are the four reasons with more detail:
1. At 2100, S&P 500 currently trades around fair value based on a range of financial metrics (P/E, EV/sales, EV/EBITDA, and P/B). During prior periods when real interest rates were 0%-1%, the forward P/E multiple averaged 11.2x, 33% below the current P/E of 16.7x. The Fed Model implies a year-end fair value of 2100 assuming the 10-year US Treasury yield climbs to 2.8% and the earnings yield gap narrows/equity risk premium falls and P/E remains at 16.7x. Note that our target would remain 2100 if interest rates remain unchanged from today’s level and the yield gap also remained constant. In prior tightening episodes, the P/E multiple has contracted by an average of 8% during the first three months following an initial Fed hike.
2. S&P 500 earnings will be essentially flat in 2015, rising just 1% ($1/share) from last year as Energy EPS plunges by 63% ($8/share). Our topdown EPS and margin forecast and bottom-up consensus are nearly identical. We estimate EPS of $114 and margins of 8.9%. Consensus equals $112 and 9.1%. Excluding Energy, 2015 S&P 500 EPS growth will equal 8%.
3. Domestic equity ETFs experiencing net outflows for the first time. US domestic equity mutual funds have witnessed net outflows in 8 of the last 9 years totaling $664 billion. But in prior years the outflow from actively managed mutual funds was more than offset by inflows into domestic ETFs. However, domestic ETFs have experienced YTD outflows totaling $6 billion. Domestic equity mutual fund YTD outflows totaled $90 billion. In contrast, international equity mutual fund and ETF inflows totaled $187 billion.
4. The US economy is expanding at an annualized pace of 3.0% based on our Current Activity Indicator (CAI), a real-time measure of GDP growth developed by our Economics research colleagues. We forecast GDP growth will average 2.6% during 2H 2015. Slack has diminished on many metrics. For example, the labor market has firmed with monthly payroll gains averaging 220,000 jobs during the past three years and the unemployment rate now stands at 5.3%. However, retail sales growth has been disappointing and inflation remains below the Fed’s target. Domestic sales represent 67% of the aggregate revenue of S&P 500 firms. Accordingly, nominal US GDP growth is the primary driver of sales growth. We forecast nominal US GDP growth of 3.3% and global ex-US growth of 3.2% in 2015.
All of which means one thing: Goldman is hoping to buy vol from any remaining clients who still have not had enough after many years of brutal muppeteering and are drawn like moths to a flame to that VIX 10 handle which for them will be proof that there is nothing to worry about (even as the credit market is approaching a Bear Stearns-like 2008 freakout) , and that the S&P will close 2015 anything but unchanged. Time to buy strangles.