Can the equity market rally extend further from here? We see fading tailwinds.
Relative to the pre-Brexit starting point, the reversal of the defensive rotation post-Brexit seems about done. While more positive growth news could provide an additional lift, we see a risk that the payback for soft Q1:16 growth that our US team has been viewing as an upside risk in Q3:16 may have already played out in the second quarter, and our forecast already calls for US growth to slow from 2.7% qoq annualized in Q2:16 to 2% in the third and fourth quarters.
Further, our financial conditions index (GS FCI) has almost completely reversed the tightening that took place from last summer through February. We worry that this major easing in the FCI has put the “Yellen Call” back in the money – that is, easier financial conditions may force the Fed to hike less “cautiously” than either the FOMC or markets have been expecting.
Finally, valuation analysis supports this view. Multiples are stretched and earnings are weak, which is why our colleagues in US portfolio strategy continue to forecast a year-end target for the S&P 500 of 2100. In last week’s US Weekly Kickstart, they noted that “the most common bullish argument cited by clients for a continuation of the equity rally is that low interest rates support higher stock prices.” But as they point out, the S&P 500 forward P/E has already expanded by 70% during the past five years; scope for further multiple expansion appears limited.
Copyright © 2016 Goldman Sachs, eFXnews™Original Article
