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Doublespeak From Goldman Sachs

Written by Briton Ryle
Posted July 31, 2019

Q: When do you raise your price target at the same time as you lower earnings estimates? 

a. When you're out of your mind

b. When you're talking about Tesla

c. When you're the U.S. equity analyst at Goldman Sachs

d. Sadly, all of the above are true

In its never-ending mission to separate hardworking Americans from their money, Goldman Sachs chief U.S. equity strategist David Kostin is raising his 2019 target for the S&P 500 to 3,100. 

"Whaddya want?" Kostin said. "It already beat my last target of 3,000. But investors are so bullish they'll keep buying stocks no matter how expensive they get so yeah, up we go."

Okay, he didn't really say that. In fact, he didn't say anything. He wrote it. And what he wrote was basically just as alarming: 

The dovish Fed pivot has driven the equity market rally in 2019, and we expect low interest rates will continue to support above-average valuations going forward.


Valuation models have expanded by 22% year-to-date, and the S&P 500 trades at roughly fair value relative to interest rates and profitability.

Okay, maybe that doesn't scare you as much as it does me. Notice that he doesn't say anything about good earnings growth, strong business conditions, or really anything that we normally associate with a bull market. All he's saying is that stock prices are rising because stock prices are rising. Wall Street calls it "valuation expansion." Another nice way to phrase it is momentum.

What it really means is that investors see prices rising and they buy because they think prices will keep rising. In some circles this is also referred to as the greater fool theory. As in, prices may be high, but there will always be a greater fool I can sell to...

What's in a Valuation Model?

A "valuation model" is how you measure how much loot people will fork over to pay for a share of stock in a company. It has nothing to do with what the company is actually worth. 

Like, if you are looking to actually buy a business, revenue and especially profit are very important. Assuming you will have to borrow some money (or find other investors) to fund the purchase, you're going to need to be able to say how long it will take the lender/investor to get their money back. 

But individual investors tend to focus on how much they might be able to sell a stock for in the future...

Pro Tip: The whole notion of value is relative to begin with. You can never pinpoint current value because it's always about future expectations, about how much a business will grow. Sure, a year or two from now, you could look back and say, "Hey, that was a bargain." Or you might say, "Wow what was I thinking?"

So how does a Goldman Sachs analyst divine that investors will be more and more willing to pay higher and higher prices for stocks? Well, first off, he does a lot of looking at what happened to prices the last time economic conditions were like they are at present. What was the Fed doing? How was sentiment? How was consumer spending? 

That's how Kostin comes to the conclusion that "low interest rates will continue to support above-average valuations going forward." 

Notice he didn't say anything about earnings growth, consumer income, debt levels, etc. That's because Kostin knows that the primary driver of stock prices is liquidity. That is, ready cash. When people have a lot of money, they spend it, er, I mean, invest it. Investing money sounds way better than just spending money, doesn't it?

And this is where Kostin and Goldman Sachs start getting really sneaky. They're playing to your ego. You're not gambling like a drunken sailor. No way! They very much want to reinforce the notion that you are doing something very important and sophisticated with your money. You're INVESTING!

They All Want Your Money

John Maynard Keynes gave us the phrase "animal spirits" to describe the point in a bull market where prices start rolling higher on their own momentum. There's a very good reason he chose a bacchanalian term (instead of something "rational")...

Think back a few years to the Obama administration. There was ever-present concern that the U.S. economy wasn't recovering quickly enough, that corporations were too heavily regulated, and so on. Never mind the incredible run for employment gains. Please ignore the fact that S&P 500 earnings went into record territory....

It just didn't feel like a drunken orgy of profits. 

But today? Oh, we've slashed regulations, cut corporate taxes — and just look at the stock market! Bacchus would be proud. Never mind that the economy is still putting up mid-2% growth and earnings growth has stalled...

We are flush with cash and throwing it around like that drunken sailor. 

Goldman Sachs knows very well that in loose times like these, investors will throw caution to the wind. And eventually, a lot of money will get thrown at some really, really bad ideas. Last time it was mortgage-backed securities...

I don't know what it will be this time. But I bet we find out sooner than later. Thanks for the heads up, Goldman.

Until next time,

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Briton Ryle

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.

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