Speaker 1: Bloomberg Audio Studios, Podcasts, radio News. I'm standing by with
Speaker 1: David Costin, chief US Equity Strategists over e Goldman Sachs,
Speaker 1: and it's an interesting day because we do see the
Speaker 1: SMP just over fifty two one hundred. Of course, we
Speaker 1: know that is also your target for the s and
Speaker 1: P five hundred for the end of the year. David,
Speaker 1: what would cause you at this point to boost that target?
Speaker 2: Well, the target is based on fundamental analysis and the
Speaker 2: way we think about it has the economy, earnings, valuation,
Speaker 2: and money flow and so on that basis, our fifty
Speaker 2: two hunderd target is what we're looking for. So in
Speaker 2: order for us to raise or lower the target, one
Speaker 2: of those variables would have to have to change. So
Speaker 2: the economic data in our assumptions are going to be
Speaker 2: reflecting growth of roughly three percent a little bit less
Speaker 2: than three percent, earnings are growing around eight percent, and
Speaker 2: valuations currently are high there at an index level basis
Speaker 2: almost twenty one times earnings, and so the probability of
Speaker 2: a multiple expansion, while possible, is less probable. The idea
Speaker 2: of earnings being much greater than we're assuming we think
Speaker 2: is pretty low. And then the question would then be
Speaker 2: money flow. So in that framework, economy, earnings, valuation, and
Speaker 2: money flow is suggestive and supports our analysis around five
Speaker 2: thy two hundred, which is a target for the end
Speaker 2: of the year, which is, as you indicated, roughly a
Speaker 2: flat return from now to the end of the year.
Speaker 1: Is there more upside or downside risk to your view
Speaker 1: at this point, I.
Speaker 2: Would say there's probably more upside. The upside would be,
Speaker 2: for example, if the Federal Reserve was to cut more rapidly,
Speaker 2: more dramatically than we are, assuming the market is assuming
Speaker 2: somewhere maybe one to two cuts the golden sas economics
Speaker 2: is looking for two cuts this year. So the extent
Speaker 2: that that was to be front loaded and you saw
Speaker 2: a cut in July, that would be supportive of potentially
Speaker 2: a higher equity market. That's not our base case. So
Speaker 2: base case is in fact that the market will trade
Speaker 2: at around this level of multiple, or in fact even
Speaker 2: lower multiple as we come towards the end of the year.
Speaker 1: When you think about the end of the year, there
Speaker 1: are some risks ahead, particularly as you've talked about before
Speaker 1: election risk. What are the things that investors are not
Speaker 1: thinking about heading into that season At this point in time,
Speaker 1: how much volatility could there be?
Speaker 2: Well, one interesting aspect of the election is that the
Speaker 2: volatility for the October futures contract is actually trades at
Speaker 2: a premium, but the volatility contract for November, which covers
Speaker 2: a little bit later than the actual election, trades a discount.
Speaker 2: And so one question that is often asked is when
Speaker 2: will we actually know the outcome of the election, not
Speaker 2: so much whether it's President Biden or President Trump, but
Speaker 2: rather will this be known in a final decision on
Speaker 2: the fifth of November or is there recounts that take
Speaker 2: place in sort of uncertainty. That's a question we get
Speaker 2: from a lot of portfolio managers.
Speaker 1: What happens after that point? You think about where volatility
Speaker 1: sits today on a spot basis, it's almost alarmingly low.
Speaker 1: Is that deceptive?
Speaker 2: Well, there's questions that clients asked about what are the
Speaker 2: policies that may change. Will there be more tariffs, Will
Speaker 2: there be a change in the regulatory environment in terms
Speaker 2: of anti trust, what kind of environment will there be,
Speaker 2: Will Congress be the Democrat or republic in the House,
Speaker 2: in the Senate, and how will that you know?
Speaker 1: What will the.
Speaker 2: Result be from the election. So those are some questions
Speaker 2: we get and then ultimately as a portfolio manager, what
Speaker 2: does one do as a as an investor? So we
Speaker 2: think about US companies that are exposed domestically from a
Speaker 2: revenue point of view as compared with companies that are
Speaker 2: exporting generate most of the revenues overseas, So that is
Speaker 2: an area that people as fund managers are more focused
Speaker 2: and we get more questions about a domestic oriented We
Speaker 2: look at companies with the exposure to anti trust and
Speaker 2: what is going to be the result both of the
Speaker 2: existing number of major suit lawsuits that are going on
Speaker 2: now in the world of technology, and does this dissuade
Speaker 2: a lot of executives from pursuing potential acquisitions as a
Speaker 2: result of the current environment, And if that was to change,
Speaker 2: might you find greater proclivity on the part of CEOs
Speaker 2: to acquire companies? Right now, you have CEO confidence that
Speaker 2: has actually increased pretty substantially, And so that's some of
Speaker 2: the discussion points with clients.
Speaker 1: It would be silly for me not to ask you
Speaker 1: about another thing that is starting to impact markets, and
Speaker 1: that is the return or lack there of the retail
Speaker 1: investor is mean stock mania two point zero back.
Speaker 2: Well, we have to think of the number of stocks
Speaker 2: that we're really looking at. There are a group of
Speaker 2: stocks relatively small in number that have a lot of
Speaker 2: excitement about those but from a fundamental point of view,
Speaker 2: they tend to be relatively smaller in market capitalization and
Speaker 2: they don't affect the index as dramatically as some of
Speaker 2: the companies in the market. We think about the big
Speaker 2: flows that take place in the market, the real drivers.
Speaker 2: There is household demand, there's mutual funds, foreign investors, pension funds,
Speaker 2: mutual funds. These are the big ownership categories. But the
Speaker 2: real net demand is coming from share repurchases on the
Speaker 2: part of companies. Companies will buy back in our estimate
Speaker 2: in the S and P five hundred close to a
Speaker 2: little more than nine hundred billion dollars of earnings, and
Speaker 2: that would be money repurchasing stock that's going to be
Speaker 2: up around thirteen percent year today.
Speaker 1: David, we have to leave it there, hitting up a
Speaker 1: heartbreak shortly. Thank you. That is David Costin, chief US
Speaker 1: equity strategist over at Goldman Sachs