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November 28, 2012

2013 US Equity Outlook: Selectively seeking growth
Portfolio Strategy Research

Look past near-term political risk to improving growth prospects US economy will gain strength as 2013 progresses
The turbulent political environment that curtailed corporate risk-taking in 2012 will end. Full ‘fiscal cliff’ will be averted but taxes will rise and federal spending will be cut. Economy will grow by 1.9% in 2013 and 2.9% in 2014. David J. Kostin

(212) 902-6781 david.kostin@gs.com Goldman, Sachs & Co.

Stuart Kaiser, CFA

Corporate fundamentals support continued profit cycle expansion We forecast S&P 500 revenues rise by more than 4% in 2013 and 2014, margins hover at current levels (8.8%-9.0%), earnings climb by more than 6% and the P/E multiple expands modestly from 13.2x to 13.8x at end 2013.

(212) 357-6308 stuart.kaiser@gs.com Goldman, Sachs & Co.

Amanda Sneider, CFA
(212) 357-9860 amanda.sneider@gs.com Goldman, Sachs & Co.

Valuation: 12-month target of 1575 reflects 12% potential return Our 3-month, 6-month, and 12-month forecasts are 1450, 1500, and 1575. We use six valuation approaches including DDM, uncertainty-based P/E multiple, cyclically-adjusted P/E multiple, price/book and ROE relationship.

Krag Gregory, Ph.D.
(212) 357-3770 krag.gregory@gs.com Goldman, Sachs & Co.

Strategies to capture growth: market, sectors, stocks
(1) Stocks will outperform Treasuries; (2) Equities will beat credit returns, although not on a risk-adjusted basis; (3) Cyclical sectors will beat defensive sectors (Materials, Industrials, Information Technology will outperform Consumer Staples, Telecom, and Health Care); (4) Double Sharpe Ratio stocks offer both high risk-adjusted earnings growth and prospective returns (Bloomberg ticker: ); and (6) Stocks with high BRICs sales exposure will beat domestic-facing firms (). Our 2013 S&P 500 total return forecast exceeds other US asset classes 16 14 12 10 8 6 4 2 0 (2) 14.2% Goldman Sachs 2013 Total Return Forecasts 7.9% 11.8 3.4

Ben Snider
(212) 357-1744 ben.snider@gs.com Goldman, Sachs & Co.

Peter Lewis
(212) 902-9693 peter.lewis@gs.com Goldman, Sachs & Co.

Rima Reddy
(801) 884-4794 rima.reddy@gs.com Goldman, Sachs & Co.

Risk/Price Yield Rates 1.6%
1.4 1.4 (1.1)

5.7 2.4 (1.1)

(1.1)%
0.6 (1.7)

S&P 500

High Yield

Investment Grade

5-year UST

Source: Compustat and Goldman Sachs Global ECS Research.

Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S. This report is intended for distribution to GS institutional clients only. The Goldman Sachs Group, Inc. Goldman Sachs

November 28, 2012

United States

Table of Contents
Our 2013 equity market outlook: Target, path, risks, and strategies Portfolio manager summary Investment recommendations: Our best ideas for 2013 Stocks vs. bonds: Compelling risk/reward Credit vs. equity: Risk premiums reflect strong fundamentals Money flow: We forecast $200 billion of potential net equity inflow Cash uses: How the S&P 500 will spend money in 2013 and 2014 Sector allocation: Moderately cyclical with growth on the horizon Risk-reward in action: EPS and price ‘Sharpe’ ratios () US equities in a global context: Seek BRICs revenue exposure US economic backdrop for 2013 and 2014 Earnings, sales, and margins Valuation: Not demanding but not “cheap” Risks: Fiscal policy and politics top the list Our 2012 scorecard Appendix A: US Portfolio Strategy baskets on Bloomberg Appendix B:...
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