Goldman Sachs has raised its year-end target for the Standard & Poor’s 500 index from 2,300 to 2,400 and its earnings per share estimates from $123 to $129, in line with a growing number of investment firms.
But Goldman notes in its second-half outlook that the S&P 500 could end the year even higher if the gap between the S&P 500 earnings yield and 10-Year Treasury yield narrows to 300 by year end, which could happen if the 10-year Treasury yield rises to 2.75% (it was at 2.33% in early afternoon trading Wednesday).
Its updated outlook is based on expectations that S&P 500 sales and margins will grow 5% and 22 basis points (to 9.7%), respectively, this year. Goldman also assumes an average 2.6% for the 10-year Treasury yield, no changes in corporate tax rates and 2.1% growth in GDP, which is at the low end of Wall Street expectations but in line with the International Monetary Fund’s latest U.S. economic outlook.
The IMF lowered its U.S. GDP growth forecast from 2.3% to 2.1% in 2017, citing technological change, a workforce that’s aging and already at full employment, a moderately overvalued dollar and policy uncertainties. It assumed, among other things, no change in U.S. tax policy or spending programs, including infrastructure spending, due to policy differences between Congress and the White House.
“The international experience and U.S. history would suggest that a sustained acceleration in annual growth of more than 1 percentage points, as projected by the administration, is unlikely,” the IMF said, noting that “the current approach to regulation, supervision and resolution [which the White House wants to reform] should be preserved.”
Goldman Sachs analysts wrote that every 1% increase in U.S. GDP results in roughly $4 additional S&P 500 EPS.
The firm is forecasting that outside of energy, technology and financial stocks will deliver the fastest growth in EPS — 9% and 13% respectively — and in dividends this year. It recommends that investors focus on companies with prospects of strong secular growth and margin expansions and overweight technology stocks, which account for 23% of the weight of the S&P 500, and financials (14%).
Its report lists 27 secular growth stocks that are selling at reasonable prices and have increased sales growth in the current modest economic growth environment. Fifteen are tech companies, eight are consumer discretionary stocks, two health care, one materials and one consumer staples.
On late afternoon Wednesday, the S&P 500 was trading at 2,433.
— Check out Bond Traders Suspect Fed Is Flirting With Policy Error on ThinkAdvisor.