Goldman Sachs says the bull market in U.S. stocks should continue for another three years. In its latest market outlook, Chief U.S. Equity Strategist David Kostin is forecasting a 15% gain in the S&P 500 over that period with a target of 3,100 by the end of 2020 and a 7% gain in the index this year with a year-end target of 2,850. (The percentage changes are set against the closing price of the S&P 500 at the end of 2017).
Earnings growth will be the dominant driver of those gains, according to Goldman.
It’s projecting a 14% gain in earnings this year, led by strong sales growth and margin expansion due to the federal corporate tax cut. Without tax reform, it says, earnings would grow just 9%.
Goldman is also forecasting a 12-month forward P/E expansion to 18.2 from 17.9 in 2017 and dividend growth of 7% with a payout ratio of 35%, slightly below the 37% of 2017.
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On a macro basis it expects 2.7% GDP growth in 2018 along with core PCE inflation (Personal Consumption Expenditures minus food and energy) of 1.8%, and four rate hikes by the Federal Reserve (the consensus is three).
Given this outlook, Goldman recommends three primary types of U.S. stocks:
- companies that invest in the future, constantly redirecting cash from operations to capital spending and R&D, aka companies with a high growth investment ratio
- companies with revenues rising 10% or more annually for several years without excessive valuations, aka Growth at Reasonable Prices (GARP)
- companies seen as likely acquisition targets in industries with low market concentration
On a sector basis, Goldman is overweight financials and industrials; neutral on tech, health care, energy, materials and telecom; and underweight consumer discretionary and consumer staples as well as utilities and real estate.