Stocks to Drop on Fiscal Cliff Debate, David Kostin Says

A possible stalemate around U.S. fiscal tightening and a slowing economy will pull stocks down this year, even as equities may gain in the longer term, Goldman Sachs Group Inc.’s chief U.S. equity strategist said.

“The uncertainty that is very significant relating to the fiscal cliff and the budget issues and the tax policy for next year are unlikely to get resolved in the very near term, and I think that is what’s weighing on the market,” New York-based David Kostin said in a radio interview today on “Bloomberg Surveillance” with Tom Keene. Still, “if you are looking where you are buying the market now, on a long term basis, it is attractive.”

The Standard & Poor’s 500 Index has gained 10 percent since June 1, heading for a 12 percent advance in 2012, as European Central bank President Mario Draghi pledged to do everything that is needed to underpin the euro-union economy. The gains came even as Europe’s debt crisis remains unresolved and U.S. lawmakers disagree on fiscal policy changes for the start of next year.

The U.S. equities gauge is less than 10 points away from a four-year high of 1,419.04 reached on April 2. The rally has pushed the S&P 500 to trade at a ratio of 13.7 times its members’ estimated earnings, from 12.2 times in June.

Kostin forecasts the S&P 500 may end 2012 at 1,250, an 11 percent drop from yesterday’s close at 1,405.53.

The so-called fiscal cliff in the U.S. is “not something that’s been focused on in the last few weeks as the response has been to the ECB and some of the positive developments there,” he said. “That has allowed the multiple to rise.”

Kostin said equities may still return investors an average of 8 percent a year in the next decade.

U.S. stocks advanced today, sending the Standard & Poor’s 500 Index toward the highest level since April, as building permits jumped in July to a four-year peak. The S&P 500 rose 0.3 percent to 1,409.34 at 10:46 a.m. in New York. The Dow Jones Industrial Average added 0.3 percent, to 13,198.85.

To contact the reporters on this story: Alexis Xydias in London at axydias@bloomberg.net; Tom Keene in New York at tkeene@bloomberg.net

To contact the editor responsible for this story: Andrew Rummer at arummer@bloomberg.net

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