The Standard & Poor’s 500 Index may climb to a record 1,575 next year, Goldman Sachs Group Inc.’s David Kostin predicts, joining four other Wall Street firms in forecasting the benchmark gauge will exceed its 2007 peak.
The strategist’ projection implies a 10 percent gain in the S&P 500 from the Oct. 12 close of 1,428.59. The advance would take the index above its all-time high of 1,565.15 reached on Oct. 9, 2007. Kostin, chief U.S. equity strategist at New York-based Goldman Sachs, reiterated his estimate for S&P 500 earnings to reach $107 a share next year.
“S&P 500 faces near-term political risk in the form of the ‘fiscal cliff’ but has long-term policy support from QE3,” Kostin wrote in a note dated Oct. 12, referring to automatic deficit cuts that could go into effect starting in January and a third round of bond purchases from the Federal Reserve to stimulate economic growth.
Wall Street strategists so far are unanimous in predicting the S&P 500 will reach a record next year, according to the five firms that have made predictions out of 15 tracked by Bloomberg. Kostin’s estimate was shared by Bank of Montreal’s Brian Belski while lower than predictions of 1,600 by Bank of America Corp.’s Savita Subramanian, 1,615 by Tobias Levkovich at Citigroup Inc. and 1,585 by Oppenheimer & Co.’s John Stoltzfus. Kostin’s profit forecast is higher than the average estimate of $106.27 from the strategists tracked by Bloomberg.
The S&P 500 has rallied 14 percent this year, poised for its biggest annual gain since 2009, amid better-than-expected earnings and unprecedented stimulus from the Fed to boost the economy. The American equity benchmark needs to increase 9.6 percent from last week’s close to reach its all-time high.
The index may slump 13 percent to end this year at 1,250 as a potential government failure to reach an agreement on deficit cuts will spur a contraction in the S&P 500’s multiples, according to Kostin. About $607 billion of automatic spending reductions and tax increases will be triggered unless a government comprised is reached this year. Goldman Sachs sees a one-in-three chance that Congress will reach a resolution by December.
The S&P 500 is trading at 14.5 times earnings, compared with an average income multiple of 16.4 over the last five decades, based on data tracked by Bloomberg. The index’s P/E ratio dropped to 12 in October 2011 after S&P stripped the U.S. of its AAA sovereign credit rating on concern spending cuts agreed on by lawmakers to raise the nation’s borrowing limit won’t be enough to reduce record deficits.