Two Things Which Could Unleash A Year-End Market Surge

bullish buyTyler Durden:  Yesterday morning, perhaps in a competition with Dennis Gartman who can be more bearish, Goldman Sachs – whose bullishness on the economy we have mocked for the past 5 years – once again capitulated, and lowered not only its S&P profit earnings forecast for the next two years (cutting 2015 from $120 to $109), but also dropped its year end price target from 2100 to 2000. As part of its latest Mea Culpa, Goldman laid out the following bearish catalysts:

  • A lower path of profits is an obvious reason to lower a price target but the risks for the index level and P/E multiple have also increased. In 2016, we expect US GDP will rise by just 2.4% and the world ex-US will expand at 3.7%, down from our prior assumptions of 2.8% and 4.3%, respectively. China is growing much slower than we previously assumed. Our CAI suggests economic growth is about 100 bp slower than the official GDP data indicates.
  • We expect the Fed will begin its long-awaited tightening process this December. Historically, rising short-term interest rates have been associated with declining P/E multiples. We expect the Treasury curve to bear flatten as short-rates rise at a faster pace than ten-year note yields during the next few years. Rising bond yields are consistent with lower multiples. Using our estimates, the P/E will slide from 16.4x today to 16.1x by 2017.
  • Finally, the political landscape in Washington, DC remains unstable following the resignation of Speaker Boehner. The federal debt ceiling will be reached in November. Precedent suggests raising the debt limit will be contentious and may rattle investors.
  • Our baseline forecast is that the US economy will grow at a modest pace, earnings will rise, and the S&P 500 index will climb slowly while the P/E multiple declines as interest rates rise(see Exhibit 2). “Flat is the new up” will be the 2016 investor refrain.


So is the market doomed to rise only 5% into year end to the now-reduced 2000 price target, which of course is Goldman’s euphemism for a major drop from the current 1900 levels?

Like every savvy cephalopod Goldman, which was wrong on the “above trend” recovery and subsequent market reaction, has chosen to hedge in case it is wrong on the way down.

According to Goldman there are two things that can unleash a rally into year end, and crush Goldman’s bearish revision: they are investor sentiment and buybacks. In other words, because supposedly everyone is bearish, and because company CEOs have to hit record stock-performance driven bogeys and will massively buy back their stock after the blackout period is finished, the biggest risk is to the upside.

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