The 'Fearless Girl' bronze sculpture outside the New York Stock Exchange.
Michael Nagle/Bloomberg“Peace of mind for your savings and your future,” promised a bulk-rate envelope in my mail pile this past week. It was a bank pitch for a “high-yield” savings account paying 0.5% a year—“10X the national average.” Meanwhile, holders of Dogecoin, a parody cryptocurrency based on a popular internet dog meme, have made 12 times their money this year.
That gives me an idea for a target-date fund that gradually shifts retirement savings from monetary satire into inflationary masochism. It’s for the risk-wary, alpha-curious, pragmatic absurdist seeking a barbell laugh-til-it-hurts allocation, and I’m willing to charge just 1%.
Or I suppose we could just stick mostly with stocks. Several weeks ago here, I relayed what money manager Jeremy Grantham told me about why he thinks the U.S. stock market is a massive bubble. This past week, David Kostin, the U.S. stock chief at Goldman Sachs, told me why he thinks that the getting is still good, and that the S&P 500 index will end the year at 4300—up about 10% from here, and 14% for the full year.
Start with earnings Valhalla. Life stunk during the fourth quarter of last year, based on Covid-19 cases, foregone holiday get-togethers, and still-high joblessness. Yet as S&P 500 companies entered the fourth-quarter reporting season weeks ago, they were expected to report a year-over-year earnings decline of just 11%—not bad for a pandemic quarter compared with a prepandemic one. Even better, numbers are now in for more than 80% of companies, and they’ve made a mockery of expectations.
Two-thirds of companies reported earnings that beat consensus estimates by one standard deviation, or statistically, a heckuva lot. That’s the second-best result in at least 23 years; the best was the quarter before. It means that fourth-quarter earnings for the overall index are now expected to come in some 2% above year-ago levels—even though the economy shrank over the same period by an estimated 2.5%.
How’s that?
For one thing, the economy, measured by gross domestic product, puts more emphasis on still-struggling industries like restaurants, whereas the S&P 500 is dominated by thriving tech giants Apple (ticker: AAPL), Microsoft (MSFT), Amazon.com (AMZN), Alphabet (GOOGL), and Facebook (FB). Last year, these grew revenue by 18%, versus a 5% decline for the other 495 members of the S&P 500. Also, companies have cut staff and their travel spending has plummeted, boosting profit margins.
Some of that corporate cost-cutting will stick in 2021. Meanwhile, Covid vaccinations are quickly gathering pace, and the White House is pushing a $1.9 trillion stimulus package. “I think you’re really going to see the acceleration in the second quarter,” says Kostin. He recently raised his estimate for 2021 earnings underlying the S&P 500 to $181 from $178. The new number is 10% above the 2019 record.
If Kostin is right about both earnings and returns, the index will end the year at about 23 times earnings, versus a historic average of closer to 15 times. For those numbers to make sense, inflation must remain contained, and bond yields, very low. Goldman’s expectation is that the 10-year Treasury yield will creep from about 1.3% recently to 1.85% by the end of 2022. Kostin predicts the Federal Reserve won’t change short-term rates until at least 2024. “You’re looking at multiple years of interest rates basically pinned around zero,” he says.
That could keep money flowing into stocks. Goldman has run surveys that suggest stimulus recipients could direct a larger portion of this year’s checks than last year’s toward investments and debt repayment, but Kostin sees three more important sources of fresh funds for stocks.
The first is $5 trillion in money-market funds, up $1 trillion from a year ago. The second is Goldman Sachs’ forecasts for a relatively weak dollar this year, which tends to attract foreign buyers to U.S. stocks. And the third is company stock buybacks, which collapsed last year, and now look likely to recover.
So there you have it: a bull case based on earnings, vaccines, stimulus, still-low rates, and money flows.
If you buy individual stocks, Goldman’s analysts have run a screen for companies whose sales tend to surge when consumers spend; whose sales and earnings are seen to be topping prepandemic levels; and whose share prices don’t look nuts relative to earnings. The names they identified include the home builder Toll Brothers (TOL); financial-services provider Charles Schwab (SCH); industrial conglomerate 3M (MMM); and Facebook.
By the way, Kostin says he doesn’t own any Bitcoin, which recently topped $55,000. “I have many, many colleagues both at the firm and elsewhere who do,” he says. Some of them say they own it as a hedge against potential debasement of the dollar. “That’s not my view, but that is the argument often put forward,” says Kostin. “I’d have difficulty saying it’s a stable asset given the fluctuations.”
I didn’t ask whether the gradual mainstreaming of Bitcoin creates a threat of long-term Dogecoin debasement, but I have my concerns.
I did ask Kostin whether he thinks Disney World will be busier than normal if I take the family there in late summer—he’s overqualified for that question, but then, I’m a vacation overplanner with access to America’s top financial forecasters. “I would say anecdotally, as well as part of the modeling, is we are expecting there’s a pent-up demand and desire for people to socialize [and] travel.”
Allow me to paraphrase: Goldman Sachs says hit the new Mickey coaster at rope drop before the big crowds show up. Also, stick with stocks.
Write to Jack Hough at jack.hough@barrons.com. Follow him on Twitter and subscribe to his Barron’s Streetwise podcast.
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