US equity upside: Limited by the ‘Yellen call’ – Goldman Sachs

FXStreet (Delhi) – Research Team at Goldman Sachs, sees limited upside to US equities in 2016.

Key Quotes

“Our US Portfolio Strategy team has a 2016 price target of 2,100 for the S&P 500, suggesting a very modest return of 5% (from current levels). Their framework assumes that 1) earnings per share will rise 10.1%, driven partly by ‘base effects’ in the energy sector and partly by improvements in global growth more generally, but that 2) the price-earnings multiple will fall approximately 5% (to 16.3x from 17.1x), as typically happens during rate-hike cycles. And, due to the delayed timing of rate hikes, the downside risk to price-earnings multiples is probably greater this year because the positive growth surprises that would normally accompany rate hikes are arguably behind us. Since our US GDP forecast envisions mild deceleration in 2016, equities and other risky assets will likely bear the brunt of rate hikes without the usual buffer of better growth data.”

“We also see a risk that the ‘Bernanke put’ will gradually be replaced by the ‘Yellen call’. The ‘Bernanke put’ captured the intuition that when the risks to growth, inflation and market sentiment are skewed to the downside and the Fed has an easing bias, monetary policy reacts aggressively to bad news. Now that these risks have receded, we expect the Fed will shift to an easing bias, implying that monetary policy will likely begin to react more aggressively to good news. The inflection point for this shift to an easing bias will arguably arrive in 2016, beyond which rallies in risk sentiment may be met by less accommodative monetary policy – the ‘Yellen call’.”

“In contrast to the US, Europe and Japan are both further from the full-employment level of GDP. Indeed, the ECB and BoJ still have an aggressive bias, and our Economics teams in Europe and Japan expect more easing in 2016 rather than less. In other words, the Draghi and Kuroda ‘puts’ are still active, which in our view implies more technical support for risky assets in these markets than in the US. We also see more room for GDP growth to surprise expectations to the upside since GDP slack in these economies is greater. In credit, this theme is one reason (among others) why we prefer Europe over the US.”

Research Team at Goldman Sachs, sees limited upside to US equities in 2016.

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