"Flat is the new up," Goldman Sachs says. The team of analysts led by David Kostin are telling clients that they still don't think the stock market will do much through the end of 2015.
After delivering double-digit gains in recent years, Goldman doesn't expect the S&P 500 to go much of anywhere. Its outlook currently calls for an index at 2,100 at the end of this year, up just barely from 2,091, as of Monday's open.
The team gives four reasons why this is their base case:
- By Goldman's calculations, the S&P 500 is currently trading at fair value.
- Mediocre growth in company earnings. The firm expects earnings to be roughly flat this year, although some sectors will fare better than others.
- ETFs and domestic equity mutual funds are both seeing outflows. For the first time, domestic equity ETFs are experiencing net outflows. The note says that in previous years, outflows from actively managed mutual funds were offset by inflows into domestic ETFs. Instead, the money seems to be flowing to international focused investments, as international equity mutual fund and ETF inflows totaled $187 billion.
- Economic growth remains modest. The firm is forecasting GDP growth at 2.6 percent in the second half of the year.
Looking past 2015, it doesn't get too much better. Goldman's 12-month target for the S&P 500 is 2150, about a three percent gain from current levels. Taking that look out even further, the firm expects the S&P 500 to be at 2300 in 2017, about a 10 percent gain from current levels.
On the bright side the firm doesn't expect a recession in the coming years. The note points out that when asked about the potential of a recession due to factors such as the rapid decline in oil or turmoil in overseas markets like China, the firm says that a contraction is not in its forecast.
An economic contraction is decidedly NOT in our forecast. Investors point to the 18% collapse in Brent during the past six weeks, the weak macro data from China and the spillover effect on global demand growth, lingering uncertainty in Europe, and the 25 bp compression in 10-year US Treasury yields during the last 30 days (to 2.19%) as reasons for concern about a US downturn. Our response is that, while the current US expansion is long in temporal terms (6 years), the magnitude of the recovery is weak and on that basis the expansion phase is closer to early-/mid-cycle.