The stock market rally is about to crumble, and investors should expect zero upside for equities through the end of the year, Goldman Sachs says
In a hard landing scenario for the economy, Kostin expects the S&P 500 to fall to 3,150, marking a 24% slide from current levels.
According to a Friday note, Goldman Sachs is becoming more skeptical about the remarkable year-to date rally in the stock markets. The S&P 500 has risen more than 7% and has eclipsed the important 4,000 level just two weeks ago. According to Goldman Sachs, the S&P 500 will only go 4,000 between now and the end. This is because a soft landing or above-trend growth has already been priced into US stocks and valuations remain at historically high levels. David Kostin, Goldman Sachs' chief US equity strategist, stated that even if there is a soft landing, it should not result in substantial equity market upside. The S&P 500 trades at a forward ratio of 18.4x "and at an even greater 'effective' multiple, if one takes into account the fact that most investors seem to expect earnings well below analyst estimates," Kostin said. This means that the current price to earn multiple drops to the 87th percentile from 1976. History and will be limited by the eventual rise in interest rates. Earnings are unlikely to grow significantly in 2023, even if there is no recession," Kostin stated. Kostin believes that S&P 500 earnings per shares will flatline in 2023 and increase 5% by 2024. Kostin stated that equity investors are aware, based on conversations, that consensus estimates are too high. Kostin raised his three-month S&P 500 target to 4,000, from 3,600. However, he kept his year-end target at 4,000. The deadline for legislators to reach a deal is June, to either raise the US borrowing limit or allow the US to default on its debt. This, along with the possibility of a recession, makes US stocks not a good deal for investors. Kostin stated that the combination of limited upside in the base case and significant downside risk if there is a recession creates a difficult distribution of outcomes for US equity investors. Kostin predicts that the S&P 500 will fall to 3,150 in a difficult-landing economy, which would represent a potential downside of 24% compared to current levels.