Earlier we noted one of the observations noted by Goldman’s David Kostin as part of his weekly market summary, namely that “the flat YTD equity market is impressive considering the news flow: Persistently disappointing domestic economic data (partly weather-related), an EM currency crisis, uncertainty in China growth and its shadow banking system, and the Russian invasion and sponsorship of the Crimea succession plebiscite on Sunday, to name just a few events since the start of 2014“… and yet the S&P is just shy of new all time highs. Actually, it is not impressive at all when one considers that centrally-planned markets do not respond to any news (especially if the news is negative – there’s “snow in the winter” for that), but really all newsflow is either bullish or ignored. Which, incidentally, means the concept of a market, which discounts events and the future, no longer exists. Indeed, it hasn’t existed since 2009 when we first noted that the Stalingrad & Propaganda 500 only reflects what the Fed wants it to reflect – an experiment that will end in far more than tears. So what else did Kostin have to say? Here it is, in a nutshell:
March 9th marked the 5th anniversary of the current bull market. S&P 500 has gained 1200 points or 178% since 2009. Three drivers of the rally: A profit rebound (59% of rally), a P/E multiple expansion (25%), and a change in expected EPS growth (16%). Looking ahead at these three drivers, we expect an 8% rise in the level of earnings this year, and a similar growth rate in 2015 given our economic forecast and assuming stable margins. S&P 500 trades around fair value at 15.6x forward EPS but the median stock trades at 16.7x, an extremely high valuation in historical terms. Our year-end 2014 target of 1900 represents a modest 3% upside from current levels.
And outside of the nutshell:
S&P 500 celebrated the five year anniversary of the current bull market by slipping almost 2% this week. At 1845, the index is now flat YTD. Below we identify the key drivers of the 178% or 1200 point market rally since the S&P 500 bottomed at 677 on March 9, 2009. We also consider how the three drivers might change in the future. Our year-end 2014 target remains 1900.
