With a modestly positive economic environment, high profit margins, improving private investment, high budget deficits and a belief that stocks are cheap….the bulls get increasingly optimistic. This is from Goldman’s Chief Equity Strategist David Kostin and his team:
“We are raising our S&P 500 dividend estimates and index return forecasts for 2013 through 2015. We expect S&P 500 index will rise by 5% from the current level to 1750 by year-end 2013, advance by 9% to 1900 in 2014, and climb by 10% to 2100 in 2015. We expect a 3-month return of 2% to 1700 and a 10% return during next 12 months to 1825. Our previous 2013-2015 year-end targets were 1625, 1775, and 1900, respectively.
1. We expect S&P 500 dividends will rise by roughly 30% between 2013 and 2015. We forecast dividend growth of nearly 11% in both 2013 and 2014 and about 9% in 2015. Our earnings forecasts remain unchanged but we have boosted our payout ratio assumptions. While 1Q year/year earnings growth of 6% was in line with expectations, dividends surged by 12% led by surprisingly large hikes from Financials and Consumer Discretionary firms. Our dividend forecasts are now in line with the dividend swap market for 2013 and 2014 but slightly above the implied levels for 2015 through 2022. Together our dividend and price target forecasts imply an S&P 500 annualized dividend yield of 2.2% from 2013 to 2015.
2. Our US Economists forecast above-trend growth in 2014 for the first time in six years. In advanced economies, the final year of economic stagnation before GDP growth exceeded trend has been associated with P/E multiple expansions averaging 15%. Our year-end 2013 forward P/E of 15x would be 14% above last year’s 13.2x. The S&P 500 currently trades at 14.6x bottom-up consensus and 15.0x our top-down NTM EPS estimates.
3. The macro investment environment supports an above-average S&P 500 valuation. Our standard valuation approaches point to a P/E multiple of 14x forward earnings. However, our revised forecast estimates an S&P 500 P/E multiple of 15x-16x during the next three years that is above the long-term average but in line with the post-1990 experience. The S&P 500 forward P/E multiple has averaged 12.9x since 1973 but 15.3x since 1990.”
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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