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S&P 500 will post a flat return in bifurcated fashion – Goldman Sachs

FXStreet (Delhi) – Research Team at Goldman Sachs, suggests that the Fed hikes will begin in December and continue steadily for several years.

Key Quotes

“When investors realize tightening will be more sustained than most expect, the P/E multiple will contract and offset the positive impact of higher EPS. A bifurcated equity market exists across many dimensions: Consumer strength vs. industrial weakness; domestic vs. foreign sales; growth vs. value; cyclicals vs. defensives; large-cap vs. small-cap.

• Economy: US GDP growth of 2.2%; unemployment falls to 4.7%; inflation moves towards 2%; Fed funds rise to 1.4% at year-end 2016

• Earnings: S&P 500 EPS will rise by 10% to $120 led by Information Technology, and Financials. Margins will be 9.1% in 2016.

• Valuation: S&P 500 trades at high valuation on most metrics. Median stock has a forward P/E multiple of 17.2x (94th percentile since 1976).

Strategies

• Own stocks with high domestic sales and avoid firms with high International sales

• Strong balance sheets: Firms with strong balance sheets will outperform in rising rate environment

• Expanding margins: Stocks able to boost margins will be rewarded as most firms have reached a margin plateau

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