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Goldman: Stocks Will Keep Climbing Because There Is No Alternative

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What You Need to Know

  • On top of the 20% the S&P 500 has already gained in 2021, Goldman strategists expect a 4% rise by year end and another 4.25% gain in 2022.
  • Cash rates are zero, bond yields are often lower than stock dividend yields and bond spreads are set to widen.
  • Buyback growth will outpace EPS growth in 2022, according to Goldman strategists.

The S&P 500 is poised to gain another 4% by year-end on top of the 20% it has already posted, according to Goldman Sachs’ strategists.

Primarily, they credit the TINA effect — there is no alternative.

“When allocating capital, the alternatives to equities appear unattractive,” wrote Goldman strategists led by Chief U.S. Equity Strategist David Kostin in a recent report that targets 4,700 for the S&P 500 by year-end.

Cash yields are almost nil, Treasury yields are low and heading slightly higher, which will depress Treasury prices, and investment grade and high yield corporate bond spreads to Treasuries are expected to widen, reducing their allure.

Moreover, more than half of S&P 500 stocks have annualized dividend yields greater than that of the investment grade index, which means that the owners of those stocks are earning more income from than owners of the average investment-grade bond.

Against this backdrop, the Goldman strategists expect that some of the $19 trillion in cash held by households, mutual funds, pension funds and foreign investors — $4 trillion more than before the coronavirus pandemic — will be deployed into stocks, adding to the current record high aggregate equity allocation among those four investor groups.

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Stocks account for 52% of their aggregate allocations; debt, 20%; and cash, 12%. The gap between equity and debt allocations is near a record high, according to Goldman.

Looking ahead, Goldman strategists expect allocations to stocks will continue to grow despite the recent deceleration in economic growth with corporations as the largest source of net equity demand in 2022, followed by households and foreign investors. They’re forecasting net equity selling by mutual funds and pension funds next year and estimating the S&P 500 will end 2022 at 4,900, which would mean a 4.25% rise from its 4,700 target for 2021.

Buybacks vs. Earnings

“Buyback growth will far outpace earnings growth next year,” according to the Goldman strategists, who are forecasting just 2% earnings-per-share growth.

Companies have authorized a total $884 billion in buybacks year-to-date, a record level. Goldman strategists expect corporations will execute about one-quarter of those buybacks in the fourth quarter as buybacks accelerate, leaving plenty of room for more buybacks in 2022. Goldman is forecasting $350 billion in corporate buybacks in 2022, up from $300 billion estimated for all of 2021.

Also expected to contribute to stock market gains next year: merger and acquisition activity,  which, at $3.24 trillion through the third quarter 2021, is running at its strongest pace since 2007.

Attractive financing rates along with strong but moderating economic growth “should provide a tailwind for further strategic M&A activity,” wrote Goldman strategists.