Over the weekend we reported on the disturbing, goalseeked excuse of a research report issued by Goldman’s David Kostin, in which the schizophrenic strategist on one hand admitted that the growth curve for stocks will flatten, that the multiple expansion phases is coming to an end and that stocks are massively overvalued. He also added that “US equities soared 42% during the past 18 months but the stellar return borrowed heavily from the future.“ On the other hand, seemingly operating under direct guidance from above to sucker even more muppets in, boosted his year end S&P500 price target (which until recently was at 1900), to 2050! Perfectly logical.
But here is the punchline. In admitting there is no fundamental case to be made for the market upside, Kostin resorted to the weakest possible justification imaginable: “the Fed model”, or the place that finds an inverse correlation between declining bond yields and yield gaps and rising equity prices.
Which is ironic: recall that until recently Wall Street was pounding the drum on rising inflation, and an imminent surge in the 10 Year, all serving to “validate” the record high S&P 500. Well, once again growth is not coming, so it’s time to flip everything around by 180.
Sure enough, first Goldman and soon everyone else, will declare that they were only kidding, and in reality what needs to happen for more market upside is even lower yields, i.e., even less economic growth!
One really can’t make this up. Alas, it is all right there, and according to some this is the reason for today’s market upside.
And here is where Goldman officially jumps the shark.
According to Goldman’s sensitivity analysis, forget 2050: all that is needed for the S&P to hit a Venezuelan 3,560 by year end is for the 10 Year to plunge to 2.0% from its current levels of 2.5%, while the yield gap, or the earnings yield less then 10 Year UST yield, should compress from its current level of 300 bps to just about 100 bps.
