Goldman Sachs’ chief US portfolio strategist, David Kostin, who took over from Abby Cohen, is tentatively calling the bottom for equity markets.
Indeed, he can see 12 per cent upside on the S&P 500 by year-end.
Here are Kostin’s five key points from a presentation entitled “Road to 1400,” dispatched to GS clients on Friday.
1. The Profit and Economic Cycles: We expect corporate profits and GDP growth to bottom during 1Q 2009. The S&P 500 has historically bottomed 4-6 months before profits and GDP, suggesting that late 2008 might be an attractive entry point for investors in this cycle.
2. Earnings: Our top-down earnings analysis projects S&P 500 EPS of $76 for 2008 and $87 for 2009, implying year/year growth of -8% and +14%, respectively. The drag on S&P 500 earnings from Financials losses should fall by $7 per share in 2009 (from $21 to $14 per share) which will lift the operating growth rate. EPS on a pre-provision and write-down basis should be $101 in 2009.
3. Bullish signpost to watch for: (a) Moderation of losses and successful capital raisings for S&P 500 Financials; (b) Steps taken to resolve the GSE crisis; and, (c) Pockets of stability in housing. Key downside risks: (a) A significant, negative event in the Financials sector; (b) Evidence of a global recession; and (c) Unexpected negative US macro news.
4. Sector weightings: We are moving our recommended sector weightings closer to the benchmark by reducing our exposure to the commodity complex and rotating modestly into some domestic cyclical sectors and domestically-exposed defensive sectors.
5. Valuation: The S&P 500 appears attractive on just about every valuation metric we measure. The DDM approach, our favored valuation method, suggests a year-end 2008 fair value of approximately 1400 – our current price target for the end of the year.
But what’s this? Sitting halfway through Kostin’s 36 powerpoint slides is a projection on future losses for global financials, estimated to total $1,300bn. And that’s the median forecast. Goldman’s “worst case” is $1,450bn, meaning the financial world still has to book another $600bn of losses - after tax!
But hey ho, stocks are well known for climbing a wall of worry…
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