It’s long been Wall Street lore that Goldman Sachs gets all the riches and Merrill Lynch gets stuck with the leftovers (and usually loses money on it). As much as they might try to rebrand and say it ain’t so, it’s still the way things work on Wall Street.
Unfortunately, for those of us that have been around long enough, you often hear something coming from Goldman and it makes you question if that’s what they really think or they are just positioning themselves to win, while others lose. I’m not trying to talk badly about them, but I just saw this headline and it made me wonder.
Don’t get me wrong, I want that to be the case. In fact, they’re not the only firm raising their year-end target.
So, what is Goldman’s year-end target? It turns out there are a few scenarios.
The first is their base target of 5,600 for the S&P 500. That’s only a few percent higher than where it is today. Not really a big deal. But they did give other scenarios that are very interesting.
The next one is that the S&P 500 equal weight plays catch-up and the price to earnings (P/E) goes up to 18x (that would bring it to its pre-pandemic highs from 2018). That target would be 5,900 (roughly 10% higher).
As you know, we have been saying that either the market will broaden out or it will eventually have to correct as the market “generals” can’t continue to carry such a wide dispersion of valuations. So, this would fall right in line with our thinking. In fact, they have a graph that shows that the disparity between valuations has been greater in the past (although I would say only in peak bubble times).
Their final scenario is a broadening out of the market as a whole, but also that mega-cap stocks extend their premium valuation to 45% (from the 30% it is today). That target would be 6,300 for the S&P, about 16% higher.
Part of that would be earnings revisions, which would be outsized for the mega-caps.
In fact, they are drawing similarities to 1995.
In fact, many others have come out with similar bullish outlooks. Here’s economist Ed Yardeni.
And how about our good friend Tom Lee.
Then there’s Stifel. That’s an interesting one.
While we think these are possible, we also think that the average stock must start participating in the market gains. We have had many fits and starts but have yet to truly catch a broad-based rally. Much of that continues to be the “fear” that the FED will continue to keep rates high and therefore restrict growth in the economy. As you know, we have been arguing that the FED doesn’t have to be that restrictive and there is room to cut interest rates. In fact, economist Mohamed El-Erian agrees with that.
For now, the FED disagrees with that notion until they see more evidence. Given any timeframe, you can see below that less and less “average” stocks are above their moving averages.
Our friends at SentimenTrader have gone back to see what has happened when the market gets like this. Since 1985, there have only been a few times where this has occurred. It has mostly occurred at market peaks. Here’s the data.
And the corresponding results.
You can see that the one time it really worked was during the late 90s when we had the tech bubble and that went on to crash over 80% in the early 2000s.
Will that happen this time? Nobody really knows, but what we can say is most of the companies in 2000 didn’t have real earnings and were trading at obscene levels. And even companies that did have earnings went sideways for 15+ years to grow into those valuations. Here’s an example of a stock. Can you guess what company it was?
Again, I don’t have a crystal ball, but like then, being diversified was and is the right call, even if it feels like you’re missing out. Hey wait, that’s FOMO (fear of missing out).
Succumbing to FOMO has led many down the path of financial problems. Let it be someone else, not us.
Well, that’s it for this week. Enjoy your week as we gear up for the 4th of July right around the corner. Reach out if you have any questions!