In a current report, Goldman Sachs addresses clients' concerns about 5 key trends in 2020. These are: the impact of plunging corporate stock buybacks; how slower than expected U.S. economic growth would affect S&P 500 profits; whether U.S. equities will continue outperforming other markets; what will drive a sustained rotation from growth to value stocks; and why Goldman favors industrial stocks over financials.
- Goldman Sachs' clients have key concerns about stocks in 2020.
- These include stock buybacks and economic growth forecasts.
- Other questions involve U.S. vs global stocks, and growth vs. value.
Significance For Investors
We summarize Goldman's views below.
Stock buybacks. Goldman estimates that buybacks will fall 15% to $710 billion during 2019, and by 5% to $675 billion during 2020. In the first 9 months of 2019, the year-over-year decline was 9%, driven by slow earnings growth, rising leverage, and CEO confidence at post-financial crisis lows. Nonetheless, $710 billion for 2019 would be the second-highest annual total ever.
Since 2011, buybacks have averaged $450 billion annually, versus net demand for equities equaling just $10 billion from all other sources combined. "A large decline in share repurchases would likely lead to slower EPS growth and wider trading ranges with higher volatility," Goldman concludes.
U.S. economic growth. Goldman's base case sees 2.3% U.S. GDP growth in 2020, with S&P 500 earnings at $174 (+6%) in 2020, and $183 (+5%) in 2021. Each percentage point change in the GDP growth rate moves earnings by $5.
Given 1.8% GDP growth in 2020, the consensus forecast, S&P 500 earnings would drop by $3, all else equal. "Our P/E multiple forecast of 18x would remain broadly unchanged," they write, adding, "we estimate that equities are already pricing US economic growth of around 2% and trade at fair value relative to interest rates and the macro environment."
U.S. vs. global stocks. U.S. outperformance reflects higher EPS growth, a greater concentration of technology stocks, and less perceived uncertainty. Goldman expects narrower U.S. outperformance in 2020, given U.S. EPS growth (+6%) "modestly higher" than Japan (+5%) and Europe (+2%), but lower than Asia ex-Japan (+12%), plus rising uncertainty about the U.S. presidential election.
Rotation from growth to value stocks. "The valuation spread between high multiple and low multiple stocks is the widest it has been since the Tech Bubble," Goldman writes. While "high valuation dispersion" historically precedes leadership by value stocks, "it carries little signal for timing."
Amid "modest economic growth," such as is projected for 2020, "investors pay a valuation premium for stocks that can generate idiosyncratic growth." They recommend reasonably-priced growth stocks "without the extreme valuations carried by many secular growth stocks."
Industrial vs. financial stocks. "We expect that a rebound in manufacturing activity and fading US-China trade tensions will support Industrials," Goldman writes. "Financials performance has been more closely correlated with global GDP growth than US growth...we believe Financials has already priced in most of our economists’ expected acceleration in growth," they add.
A recent concern involves U.S. government data showing much weaker profit growth than is being reported by S&P 500 companies. Goldman notes that the National Income and Product Accounts (NIPA) include many smaller, less efficient, and less profitable companies than those in the S&P 500.
A Wall Street Journal column acknowledges that disparities in taxes, size, and sectors drive much of the difference. However, it also suspects "accounting shenanigans" driven by "CEO bonus structures," noting overly-aggressive write-downs in 2008 and 2009 that increased future profit growth.