Goldman Sachs strategists are estimating a 5% gain in the S&P 500 next year. That’s close to three times the year-to-date return of the index through November 2, following steep losses in October.
Underpinning the Goldman forecast are expected net sales by pension funds (-$100 billion), mutual funds (-$125 billion) and households (-$175 billion) offset in part by net buying from foreign investors (+100 billion) and most prominently corporations (+$700 billion).
“Corporates will be, by far, the biggest source of equity demand given a 20%+ gross buyback growth and a favorable backdrop for M&A,” write Goldman Sachs strategists in their latest Flow of Funds report. A potential record year for IPOs, which could include Uber, Airbnb and Slack among other large privately held U.S. companies, however, could partially offset corporate net purchases of equities.
While corporate purchases of U.S. equities are expected to top all previous years dating back to at least 2013, net purchases by foreign investors are expected to fall to their lowest level since 2016, when they actually declined. An expected 3% decline in the U.S. dollar versus foreign currencies is seen supporting foreign U.S. equity purchases.
Overall Goldman Sachs strategists “expect investors will reduce portfolio risk in 2019.” Their allocation to equities currently is the highest since the tech bubble in 2000 and it accounts for 44% of total direct and indirect financial assets owned by households, mutual funds, pension funds, and foreign investors.
“A flattening yield curve, modest equity market outperformance vs. bonds and cash, and low current cash balances should continue to support risk-averse asset rotations next year,” write Goldman strategists.
The same groups of investors that are expected to be net sellers of U.S. stocks next year — pension funds, mutual funds and households — are also net sellers this year.
Pension funds have been net sellers of stocks every year since 2009 (they tend to sell stocks and buy bonds when rates are rising, which reduces the present value of their liabilities) and Goldman expects this trend will continue even though rates are expected to rise more slowly next year than this year.
Among mutual funds, actively managed funds will be the primarily sellers of equities as investors continue to switch to passively managed funds and, in even greater numbers, to equity ETFs. Goldman estimates the equity ETFs will take in $300 from investors in 2019.
“Investor outflows from mutual funds — by far the biggest determinant of fund equity demand since 1990–will persist in 2019, consistent with 10 of the past 11 years.”
Households are expected to be net sellers of equities next year because demand for stocks tends to weaken when GDP growth declines, which is what Goldman is forecasting.
The firm’s economists expect growth will drop from 3% this year to 2.6% in 2019. The strategists also note that the household category, from the Federal Reserve’s Financial Accounts of the United States report, which is a primary source for their Flow of Funds report, includes not just retail investors but also nonprofits, endowments, domestic hedge funds, private equity funds and personal trust.
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