Goldman Sachs strategist David Kostin now runs with biggest bulls

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Goldman Sachs strategist David Kostin now runs with biggest bulls
BY:ALEXANDRA SCAGGS From: Dow Jones May 22, 2013 8:02AM
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GOLDMAN Sachs is doubling down on its optimistic view.

The Standard & Poor's 500-stock index closed above 1625, the previous year-end target from chief US equity strategist David Kostin, two weeks ago. So he has raised his year-end target by 7.7 per cent, to 1750. That would mean a 5 per cent gain from here by the end of the year.

The bank's new, higher target is a matter of the multiple--the price/earnings ratio. But the boldest call comes from the bank's US economics team, which says that "the end of US economic stagnation" is coming next year.

Working off that thesis, Mr Kostin found that in the year ahead of a full recovery, or economic growth "returning to trend," the price/earnings ratio for the next year's expected earnings usually expands by 15 per cent. He is expecting a 13 per cent expansion this year, so he thinks the S&P 500 will trade at 15 times its forecast earnings for the next 12 months, which he expects to be $US108 per share. That would mean a slight expansion from the current level, as it is currently trading at 14.8 times its expected earnings.

As for next year, the bank expects the S&P 500 to add another 9 per cent, to end the year at 1900. For 2015, he expects 11 per cent gains, for the S&P 500 to close the year at 2100. While both seem like heady heights, they would constitute slowing in the rally that has led the S&P 500 to climb 17 per cent so far this year.

Mr Kostin is now running with the biggest bulls on Wall Street. The latest increase has put him above J.P. Morgan Chase's Thomas Lee, a noted bull who recently raised his year-end target to 1715, and Canaccord Genuity's Tony Dwyer, who was among the first to raise his year-end target above 1700, raising it to 1760 in late March.

S&P500 will gain until 2015, says Goldman Sachs
Date
May 22, 2013 - 7:41AM




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Goldman Sachs says the US stock market rally may last at least another 2 1/2 years, sending the Standard & Poor's 500 Index up 26 per cent to 2100.
David Kostin, the bank's New York-based chief US equity strategist, raised forecasts for the US equity benchmark, predicting it will finish 2013 at 1,750 and 2014 at 1,900 as stock valuations increase, according to a research report dated yesterday. The S&P 500 trades at 16.3 times reported operating profit, 16 per cent below the average since 1998, data compiled by Bloomberg show.
“Our positive 2013 outlook for S&P 500 has played out much faster than we expected,” Kostin wrote. “Reasons for a higher multiple include increased confidence in the medium-term outlook for US economic growth, improving investor risk appetite and the wide gap between equity and bond yields that we now assume will be closed more by stocks than bonds.”
Goldman Sachs's increase comes after Thomas Lee, JPMorgan Chase & Co.'s chief US equity strategist, lifted his estimate to 1,715 from 1,580 last week. The S&P 500 has surged 17 per cent in 2013 as companies beat earnings estimates and the Federal Reserve continued its unprecedented bond-buying program known as quantitative easing.
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The equity benchmark gained 0.2 per cent to 1,669.16 at 4 p.m. New York time today. The index has rallied 128 days without a retreat exceeding 5 per cent or more, the longest stretch since the 173 days ending Feb. 20, 2007, data compiled by Bloomberg show.
Dividend Growth
S&P 500 companies from Apple Inc. to Clorox Co. raised dividends this year, giving the index a higher dividend increase than earnings expansion for the first quarter, according to Kostin. Dividends will rise 30 per cent by 2015, with an 11 per cent increase this year, adding about 150 points to the S&P 500, he said.
“Dividend growth has been pretty robust,” Kostin said in a phone interview today. “A lot of companies with these super high margins are distributing more cash to shareholders with high dividends.”
Excess Returns
US stocks are poised to gain during the next five years thanks to record-low interest rates on government bonds, according to researchers at the Federal Reserve Bank of New York. A survey of 29 models for the equity risk premium -- the expected future return of stocks over the risk-free rate offered by Treasuries -- shows “we will enjoy historically high excess returns for the S&P 500,” Fed economists Fernando Duarte and Carlo Rosa said in a paper released on May 8. The premium rose to a record 5.4 per cent in December, they said.
The S&P 500 added 2.1 per cent last week, its fourth straight weekly gain, as gauges of leading economic indicators and consumer sentiment beat estimates. The US bull market has entered its fifth year, adding about $US11.5 trillion in market value, according to data compiled by Bloomberg.
“It's certainly been a substantial and powerful move in equity prices in a short period of time, there's no question,” Kostin said today. “This year, basically all that market move has been valuation-driven,” he said. “The economy's re- accelerating from a multi-year period of stagnation to an above- trend growth rate, and that would be consistent with P/E expansion.”
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Source: Bloomberg
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