It really has not been a good year for Goldman forecasts. Alternatively, it has been a phenomenal year to fade every prediction made by Goldman (and Gartman) in the past 12 months.
Just last weekend, Goldman once again doubled down on what has been a distinctly wrong call since the Brexit aftermath, urging clients to “sell” equities for the next three months even as central banks unleashed one of the most forceful monetary reactions in recent history, steamrolling over all shorts. In response to this latest reco, wewondered if “Goldman again be wrong? It’s distinctly possible, in which case we expect the firm to capitulate some time in September, when the S&P is around 2,300 and urging what clients it has left to buy stocks at all time highs. That would clearly market the moment to sell everything. On the other hand, considering Goldman dreadful forecasting record over the past year, it is about time the firm got one reco right, if only purely statistically.”
So far, that has not happened, and to the contrary, in his latest weekly weekly kickstart note, Goldman’s chief equity strategist David Kostin once again warned of an imminent drawdown, followed by a slow grind higher, predicting “no medal winner in the race for highest 12-month returns given each region is ‘fat and flat’”
Here is why Goldman, like the smart money, continues to see little upside in the stock market:
Global stock valuations appear stretched while volatility has fallen. The S&P 500 (17.2x) and STOXX 600 (14.9x) both trade at forward P/E’s one standard deviation or more above their 10-year averages. MXAPJ (13.5x) trades at an above-average multiple relative to its history while TOPIX (13.6x) trades in line with the past decade (see Exhibit 1). Since Brexit, oneyear implied volatility for each index has fallen below its 12-month average.
Earnings season so far has been in-line with history in the US and Asia ex-Japan while results have positively surprised in Europe and Japan. 46% of reported S&P 500 firms have beaten EPS estimates (vs. average of 46%), and 13% have missed estimates (vs. 15% average). However, 2Q EPS estimates have been revised down by 16% since January. In Asia ex-Japan, 2H 2016 results are tracking 50% of full-year estimates, in line with history. In Europe, EPS surprises have been 3.4% above expectation vs. a historical average of 1.0%. In Japan, positive surprises have outweighed negative surprises, and the quarterly growth forecast has risen slightly.
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