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According To Goldman, These Are The Two Things Which Could Unleash A Year-End Market Surge

Yesterday morning, perhaps in a competition with Dennis Gartman who can be more bearish, Goldman Sachs - whose bullishness on the economy we have mocked for the past 5 years - once again capitulated, and lowered not only its S&P profit earnings forecast for the next two years (cutting 2015 from $120 to $109), but also dropped its year end price target from 2100 to 2000. As part of its latest Mea Culpa, Goldman laid out the following bearish catalysts:

  • A lower path of profits is an obvious reason to lower a price target but the risks for the index level and P/E multiple have also increased. In 2016, we expect US GDP will rise by just 2.4% and the world ex-US will expand at 3.7%, down from our prior assumptions of 2.8% and 4.3%, respectively. China is growing much slower than we previously assumed. Our CAI suggests economic growth is about 100 bp slower than the official GDP data indicates.
  • We expect the Fed will begin its long-awaited tightening process this December. Historically, rising short-term interest rates have been associated with declining P/E multiples. We expect the Treasury curve to bear flatten as short-rates rise at a faster pace than ten-year note yields during the next few years. Rising bond yields are consistent with lower multiples. Using our estimates, the P/E will slide from 16.4x today to 16.1x by 2017.
  • Finally, the political landscape in Washington, DC remains unstable following the resignation of Speaker Boehner. The federal debt ceiling will be reached in November. Precedent suggests raising the debt limit will be contentious and may rattle investors.
  • Our baseline forecast is that the US economy will grow at a modest pace, earnings will rise, and the S&P 500 index will climb slowly while the P/E multiple declines as interest rates rise (see Exhibit 2). “Flat is the new up” will be the 2016 investor refrain.

 

So is the market doomed to rise only 5% into year end to the now-reduced 2000 price target, which of course is Goldman's euphemism for a major drop from the current 1900 levels? Like every savvy cephalopod Goldman, which was wrong on the "above trend" recovery and subsequent market reaction, has chosen to hedge in case it is wrong on the way down.

According to Goldman there are two things that can unleash a rally into year end, and crush Goldman's bearish revision: they are investor sentiment and buybacks. In other words, because supposedly everyone is bearish, and because company CEOs have to hit record stock-performance driven bogeys and will massively buy back their stock after the blackout period is finished, the biggest risk is to the upside.

To wit:

Light investor positioning and corporate buybacks represent the largest upside risks to our year-end target. Our S&P 500 Sentiment Indicator based on futures positioning data sits at 0 on a scale from 0 to 100, where it has been for seven of the past eight weeks, the longest stretch in its eight-year history. Historically, indicator readings below 10 or above 90 have been statistically significant contrarian indicators, with very light positions indicating short-term tactical upside (+2% to +4% during the next 4 to 10 weeks).

 

 

Nearly 25% of annual corporate buybacks occur during November and December. S&P 500 buyback authorizations have exceeded $450 billion through the first three quarters of 2015, and we expect gross repurchases by S&P 500 companies will total more than $600 billion in 2015. Buybacks represent the single largest source of demand for US equities. Most firms are currently in their blackout periods ahead of 3Q earnings reports. The typical year-end surge in buyback activity could help boost the market above our year-end target.

 

Of course, the irony of the above is that Goldman's buyback desk is by far the most active one on Wall Street, so if anyone knows what happens with buybacks - or has any determination over their pace - it is Goldman. As for everyone being bearish, we'll just take Goldman's "honest" word for that.