Goldman's Incredibly Depressing Pred for 2016# Stock
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Goldman's Incredibly Depressing Predictions for 2016
by Stephen Gandel
@stephengandel
November 25, 2015, 1:23 PM EST
No holiday cheer for investors this year.
In a research note out this week, Goldman Sachs’ top strategists predict
that stocks will once again disappoint next year. Goldman predicts the S&P
500 will go nowhere in the coming year, ending 2016 at 2,100. The stock
market index is already at 2,090. Include dividends and Goldman predicts
that stocks will return just 3% in 2016. Stocks are up a measly 1.5% in 2015.
Goldman says the market will hit a headwind of rising interest rates, a
strengthening dollar, and stalled profitability. One major concern is the
price of stocks, which Goldman says are high by historic standards. Goldman
GS 1.05% says the price-to-earnings ratio of the market will be just over 16
, based on its prediction of where profits will be at the end of 2016. “
Only 6% of the time during the last 40 years has the median stock traded at
a p/e multiple higher than it does today,” wrote Goldman’s analysts, lead
by David Kostin, in the research report.
What’s more, Goldman says p/e multiples tend to fall by 10% in the six
months following a Fed’s first interest rate increase, which is widely
believed to take place in December. Goldman says the Fed is likely to
increase interest rates faster than expected.
Another problem: stalled profitability. Goldman says profit margins at most
companies have been flat for the past few years. Yet overall margins have
appeared to continue to rise, pushed up mostly by the technology sector, and
Apple in particular. But Goldman predicts that even tech sector profit
margins have probably peaked at this point.
One bit of good news: Actual profits won’t be that bad in 2016. Goldman
says that earnings per share for the average S&P 500 company will rise by
about 10% in 2016. That would be a rebound this year, though some of that
growth is surely coming from share buybacks and not actual earnings
improvements. On Tuesday, the Commerce Department said that corporate
profits in the third quarter had the biggest 12-month drop since the
recession, down nearly 5%. But the 10% drop in p/e multiples will wipe out
any gain stocks would get from higher earnings.
Goldman says if you do want to bet on individuals stocks, it’s better to
place your bets on companies that get most of their sales in the U.S. Those
companies will not be hit as hard by a strong dollar. Among the stocks
Goldman recommends for 2016 are Amazon AMZN 2.81% , Chipotle Mexican Grill
CMG -0.73% , Whole Foods WFM -0.03% , and Wells Fargo WFC 1.12% .
Bear in mind, Goldman is predicting a rather rare scenario. Investors don’t
tend to stay down in the dumps for long. The last time stocks had two
disappointing years in a row was in 2001 and 2002. And there have only been
five times since 1928 in which the stock market increased by less than 5% a
year for two years in a row. Most of those cases happened around a recession
, which is not what Goldman is predicting for next year.
On top of that, most of the things Goldman is predicting are widely
acknowledged. And if the Fed ends up raising rates faster than expected,
that would probably be because the economy is doing better than expected.
So the market could disappoint next year. But I won’t spend my Thanksgiving
worrying about it.
by Stephen Gandel
@stephengandel
November 25, 2015, 1:23 PM EST
No holiday cheer for investors this year.
In a research note out this week, Goldman Sachs’ top strategists predict
that stocks will once again disappoint next year. Goldman predicts the S&P
500 will go nowhere in the coming year, ending 2016 at 2,100. The stock
market index is already at 2,090. Include dividends and Goldman predicts
that stocks will return just 3% in 2016. Stocks are up a measly 1.5% in 2015.
Goldman says the market will hit a headwind of rising interest rates, a
strengthening dollar, and stalled profitability. One major concern is the
price of stocks, which Goldman says are high by historic standards. Goldman
GS 1.05% says the price-to-earnings ratio of the market will be just over 16
, based on its prediction of where profits will be at the end of 2016. “
Only 6% of the time during the last 40 years has the median stock traded at
a p/e multiple higher than it does today,” wrote Goldman’s analysts, lead
by David Kostin, in the research report.
What’s more, Goldman says p/e multiples tend to fall by 10% in the six
months following a Fed’s first interest rate increase, which is widely
believed to take place in December. Goldman says the Fed is likely to
increase interest rates faster than expected.
Another problem: stalled profitability. Goldman says profit margins at most
companies have been flat for the past few years. Yet overall margins have
appeared to continue to rise, pushed up mostly by the technology sector, and
Apple in particular. But Goldman predicts that even tech sector profit
margins have probably peaked at this point.
One bit of good news: Actual profits won’t be that bad in 2016. Goldman
says that earnings per share for the average S&P 500 company will rise by
about 10% in 2016. That would be a rebound this year, though some of that
growth is surely coming from share buybacks and not actual earnings
improvements. On Tuesday, the Commerce Department said that corporate
profits in the third quarter had the biggest 12-month drop since the
recession, down nearly 5%. But the 10% drop in p/e multiples will wipe out
any gain stocks would get from higher earnings.
Goldman says if you do want to bet on individuals stocks, it’s better to
place your bets on companies that get most of their sales in the U.S. Those
companies will not be hit as hard by a strong dollar. Among the stocks
Goldman recommends for 2016 are Amazon AMZN 2.81% , Chipotle Mexican Grill
CMG -0.73% , Whole Foods WFM -0.03% , and Wells Fargo WFC 1.12% .
Bear in mind, Goldman is predicting a rather rare scenario. Investors don’t
tend to stay down in the dumps for long. The last time stocks had two
disappointing years in a row was in 2001 and 2002. And there have only been
five times since 1928 in which the stock market increased by less than 5% a
year for two years in a row. Most of those cases happened around a recession
, which is not what Goldman is predicting for next year.
On top of that, most of the things Goldman is predicting are widely
acknowledged. And if the Fed ends up raising rates faster than expected,
that would probably be because the economy is doing better than expected.
So the market could disappoint next year. But I won’t spend my Thanksgiving
worrying about it.