Friday, 3 February 2012
Kostin (GS) sees S&P500 at 1325 with low low volatility
Kostin of Goldman Sachs still cannot be persuaded to go for higher targets for the S&P at the end of 2012. Het thinks PE’s will not change much, in the short run they can rise a bit and then they can go don somewhat. Profits in the US can rise with 3% in 2012. So PE’s and profits are not pointing to an exploding or imploding S&P500.
The macro fundamentals are getting more encouraging for the US, 2% GDP growth should be possible. With the help from central banks liquidity has gone up and so volatility is forced lower for equities (VIX). That should mean that PE’s can rise in the short term.
Later in 2012 the profit margins will decline and that should lead to lower PE’s as he thinks (and when true should be normal).
The chart with the equity risk premium (ERP) shows that equities have been too cheap in Q3 2011 and that GS thinks on the short run the ERP will improve to what has been average since Lehman. The ERP will move with the profit margins and these will deteriorate in H2 (GS). The top down estimates are pretty much n step of what GS (Kostin) thinks and the market has that priced in (not the bottom up forecasts).
This can surprise a bit to the upside, especially when volatility will remain low and then PE’s can be a bit better than Kostin calculates.