Christian Mueller-Glissmann, equity strategist at Goldman Sachs Group, is neutral on stocks over the next year, according a recent research report. David Kostin, chief U.S. equity strategist at Goldman, expects the S&P 500 to fall between 5% and 10% over the next few months. He also expects the S&P 500 to end the year at 2,100. It closed on May 18th at 2,047.
Why do these two strategists expect equities to falter over the next few months and beyond? There are five reasons. (For more, see: Will 2016 Bring a Bear Market?)
The first reason is valuations. There has been a lack of earnings growth, and the Forward P/E for the S&P 500 currently falls into the 99th percentile on a historical basis. The only way stocks can sustainably move higher is if earnings surprised to the upside. That might be a lot to ask for in the current global economic environment.
The second reason is sentiment. According to Goldman Sachs’s Sentiment Indicator, it currently stands at 32, which isn’t as bullish as during the winter. This factor shouldn’t be relied on too much because sentiment can be taken at face value or looked at from a contrarian viewpoint. (For more, see: Top 5 Positions in Goldman Sachs' Portfolio.)
The third reason is the Federal Reserve and interest rate expectations. Goldman Sachs expects two rate hikes this year while most economists and analysts expect zero or one. If Goldman Sachs is correct, then a hawkish surprise isn’t likely to bode well for equities.
The fourth reason is that’s it’s an election year. According to Kostin, the election is a part of every client conversation. Apparently, clients feel as though the election will have a big impact on their portfolio. Historically, equities are range-bound in the summer preceding an election, but the country has rarely seen what is perceived as two (or three) bad choices for presidential candidates. (For more, see: 4 Ways that the Presidential Election Will Affect Your Portfolio.)
The fifth reason is a slowdown in corporate buybacks. A lot of that financial engineering you’ve been hearing about relates to corporate buybacks, which reduces share count and improves earnings per share. Without those buybacks, demand for those stocks wanes. Buybacks won’t disappear, but if they slow down it could hurt. (For more, see: Goldman Sachs See Short-Term Pull Back in Stocks.)