Goldman Sachs might be a bit more optimistic about the economy, but that optimism isn’t necessarily translating into market optimism. Goldman’s Chief US Equity Strategist David Kostin is sticking to his year-end 1250 price target for the S&P 500 and expects worries over the fiscal cliff to resurface as we hear into year-end and markets discount the potential for a rockier road in 2013 (via Zero Hedge & CNBC):
“Why are we maintaining our year-end forecast in spite of the market’s recent rally back above 1400, the positive developments in Europe, and tentative evidence the US economy may be sprouting “green shoots”? A look at the 2011 trading pattern of the S&P 500 explains the reason for our belief that the market has an asymmetric risk profile and offers more downside risk than upside opportunity. Political realities and last year’s precedent suggest the potential that Congress fails to reach agreement in addressing the ‘fiscal cliff’ is greater than what most investors seem to believe based on our client conversations.
…Last year, the deadline for Congress to raise the federal debt ceiling was known months in advance. Nevertheless, Congress was unable to reach an agreement that satisfied all factions. Investors were stunned and the S&P 500 plunged 11 percent in 10 trading days.
…Numerous uncertainties exist and any one of them could spark a reversal of the recent equity market rally. Known risks include the US fiscal cliff (federal debt ceiling tax policy, sequestration); US election; China growth; European political, sovereign debt, and bank funding crises; and Iran/Israel tensions. Our year-end 2012 target of 1250 is nearly 12% below the current index level. Why are we maintaining our forecast in spite of the market’s recent rally back above 1400, the positive developments in Europe, and tentative evidence that the domestic economy may be sprouting “green shoots”?
…What is the downside market risk if Congress does not address the “fiscal cliff”? Goldman Sachs US Economics research estimates that the impact of the fiscal cliff would weigh on real 2013 GDP growth by nearly 4 percentage points if scheduled year-end policy changes were to take effect permanentl. Applying this to our US economists’ forecast, GDP would contract by roughly 0.4% in 2013.
Our current baseline 2013 GDP growth forecast of 2.0% assumes the following: payroll tax cuts expire after 2012, jobless benefits are phased down to a maximum of 59 weeks, income tax cuts are extended through 2013, and automatic spending cuts do not take effect. This fiscal drag represents roughly 1.2 percentage points. Conversely, if everything is extended, the effect of Federal, state, and local fiscal policy on GDP growth would be -0.5 percentage points and 2013 GDP growth would be about 2.7%.”