Goldman pushes back against bears like Morgan Stanley with 4,500 S&P 500 target

The latest S&P 500 push has done nothing to convince the bearish Mike Wilson of Morgan Stanley who is repeating his view that gains can’t last because the earnings recession isn’t over. He says investors may be making two costly assumptions right now:

“First, that the impact of interest rate hikes on growth is behind us; and second, that several areas of the market, including consumer cyclicals, tech and communications services, experienced their own earnings recession last year and are likely to see accelerating earnings growth even as other parts of the market suffer,” he writes in a fresh note to clients. His base case sees the S&P 500 dropping to 3,900.

Pushing back on that is our call of the day from Goldman Sachs where strategists have lifted their S&P 500 target to 4,500 from 4,000, making the bank among the most bullish on Wall Street.

A team led by equity strategist David Kostin says their unchanged 2023 earnings per share forecast of $224 assumes a “soft landing,” and is above consensus calling for $206. They note the bank’s economists see a 25% chance of recession in the next 12 months, versus the consensus 65%.

And while the S&P’s current price/earnings multiple of 19 times is bigger than expected, thanks to a few mega cap stocks, the strategists say “prior episodes of sharply narrowing breadth have been followed by a ‘catch-up’ from a broader valuation re-rating.” Breadth refers to how many stocks are participating in the current rally, with some worried the bear-market exit for the S&P 500 has largely been driven by a few tech stocks.

“If economic growth data remain resilient and inflation continues to soften in line with our economists’ forecast, a declining equity risk premium will likely offset slightly higher real interest rates and support current equity multiples.” said Goldman.

They also differ with Morgan Stanley’s Wilson, who believes current AI hype won’t change the overall trajectory of the earnings cycle.

Goldman strategists believe increased productivity and trend real GDP growth from widespread AI adoption will lift the 20-year compound annual growth rate for S&P 500 earnings per share from 4.9% to 5.4%. There are uncertainties, such as how soon adoption of AI will take place, and the extent to which regulatory policy, taxes and interest rates could offset any production boost.

Kostin and the team say big downside risks to their cheerier S&P 500 view are “an unexpected downturn in growth and stubborn inflation that triggers a hawkish Fed pivot.” A mild recession could knock 10% off S&P EPS, bringing it down to $200 and in line with the historical 13% average fall during recessions, they said.

In a mild recession, they see Fed easing leading to a 19% contraction in price/earnings multiples for the S&P 500 and a 9% drop in consensus 2024 EPS to $223 from $246 currently, pushing the S&P 500 to 3,400.

The markets

Stock futures
ES00,
+0.27%

YM00,
+0.12%
are modestly higher, led by tech
NQ00,
+0.51%,
with Treasury yields
TMUBMUSD10Y,
3.747%

TMUBMUSD02Y,
4.594%
holding steady, while oil prices
CL.1,
-2.31%
are down over 2%. The dollar
DXY,
-0.08%
is also headed south.

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The buzz

A two-day Fed meeting starts Tuesday, with May CPI due the same day. Among other highlights — producer prices for for Wednesday, retail sales and regional manufacturing surveys on Thursday. For Monday, we’ll get an update on the federal budget at 2 p.m. Policy decisions from the European Central Bank and Bank of Japan will come Thursday and Friday, respectively.

Read: The Fed’s crystal ball on inflation appears off the mark again. Here comes another fix.

Chinook Therapeutics stock
KDNY,
+0.17%
is surging 65% after Novartis
NVS,
+0.28%
said it will acquire the clinical-stage biopharmaceutical company for up to $3.5 billion. 

Nasdaq shares
NDAQ,
+0.28%
are off 5% after the securities trading and listing company said it will buy software group Adenza in a $10.5 billion stock and cash deal from Thoma Bravo.

Biogen shares
BIIB,
+1.31%
is up 4% after an FDA committee voted unanimously to recommend approval of the biotech’s Alzhiemer drug made with Eisai
ESALF,
+9.35%.

Chase
CCF,
-1.05%
stock is up 2% after The Wall Street Journal reported that the specialty-chemicals maker is looking to sell itself and has gotten multiple bids.

Oracle
ORCL,
+2.21%
will report earnings after the bell.

Genomics company Illumina
ILMN,
-1.08%
said it accepted the resignation of Chief Executive Francis deSouza, amid a monthslong battle with activist investor Carl Icahn, who had pushed for his ouster. The stock is up 2%.

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