WEBVTT - David Kostin Talks Markets

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<v Speaker 1>Bloomberg Audio Studios, Podcasts, radio News. I'm standing by with

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<v Speaker 1>David Costin, chief US Equity Strategists over e Goldman Sachs,

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<v Speaker 1>and it's an interesting day because we do see the

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<v Speaker 1>SMP just over fifty two one hundred. Of course, we

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<v Speaker 1>know that is also your target for the s and

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<v Speaker 1>P five hundred for the end of the year. David,

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<v Speaker 1>what would cause you at this point to boost that target?

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<v Speaker 2>Well, the target is based on fundamental analysis and the

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<v Speaker 2>way we think about it has the economy, earnings, valuation,

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<v Speaker 2>and money flow and so on that basis, our fifty

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<v Speaker 2>two hunderd target is what we're looking for. So in

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<v Speaker 2>order for us to raise or lower the target, one

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<v Speaker 2>of those variables would have to have to change. So

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<v Speaker 2>the economic data in our assumptions are going to be

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<v Speaker 2>reflecting growth of roughly three percent a little bit less

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<v Speaker 2>than three percent, earnings are growing around eight percent, and

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<v Speaker 2>valuations currently are high there at an index level basis

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<v Speaker 2>almost twenty one times earnings, and so the probability of

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<v Speaker 2>a multiple expansion, while possible, is less probable. The idea

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<v Speaker 2>of earnings being much greater than we're assuming we think

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<v Speaker 2>is pretty low. And then the question would then be

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<v Speaker 2>money flow. So in that framework, economy, earnings, valuation, and

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<v Speaker 2>money flow is suggestive and supports our analysis around five

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<v Speaker 2>thy two hundred, which is a target for the end

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<v Speaker 2>of the year, which is, as you indicated, roughly a

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<v Speaker 2>flat return from now to the end of the year.

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<v Speaker 1>Is there more upside or downside risk to your view

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<v Speaker 1>at this point, I.

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<v Speaker 2>Would say there's probably more upside. The upside would be,

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<v Speaker 2>for example, if the Federal Reserve was to cut more rapidly,

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<v Speaker 2>more dramatically than we are, assuming the market is assuming

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<v Speaker 2>somewhere maybe one to two cuts the golden sas economics

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<v Speaker 2>is looking for two cuts this year. So the extent

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<v Speaker 2>that that was to be front loaded and you saw

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<v Speaker 2>a cut in July, that would be supportive of potentially

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<v Speaker 2>a higher equity market. That's not our base case. So

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<v Speaker 2>base case is in fact that the market will trade

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<v Speaker 2>at around this level of multiple, or in fact even

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<v Speaker 2>lower multiple as we come towards the end of the year.

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<v Speaker 1>When you think about the end of the year, there

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<v Speaker 1>are some risks ahead, particularly as you've talked about before

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<v Speaker 1>election risk. What are the things that investors are not

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<v Speaker 1>thinking about heading into that season At this point in time,

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<v Speaker 1>how much volatility could there be?

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<v Speaker 2>Well, one interesting aspect of the election is that the

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<v Speaker 2>volatility for the October futures contract is actually trades at

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<v Speaker 2>a premium, but the volatility contract for November, which covers

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<v Speaker 2>a little bit later than the actual election, trades a discount.

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<v Speaker 2>And so one question that is often asked is when

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<v Speaker 2>will we actually know the outcome of the election, not

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<v Speaker 2>so much whether it's President Biden or President Trump, but

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<v Speaker 2>rather will this be known in a final decision on

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<v Speaker 2>the fifth of November or is there recounts that take

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<v Speaker 2>place in sort of uncertainty. That's a question we get

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<v Speaker 2>from a lot of portfolio managers.

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<v Speaker 1>What happens after that point? You think about where volatility

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<v Speaker 1>sits today on a spot basis, it's almost alarmingly low.

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<v Speaker 1>Is that deceptive?

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<v Speaker 2>Well, there's questions that clients asked about what are the

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<v Speaker 2>policies that may change. Will there be more tariffs, Will

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<v Speaker 2>there be a change in the regulatory environment in terms

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<v Speaker 2>of anti trust, what kind of environment will there be,

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<v Speaker 2>Will Congress be the Democrat or republic in the House,

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<v Speaker 2>in the Senate, and how will that you know?

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<v Speaker 1>What will the.

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<v Speaker 2>Result be from the election. So those are some questions

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<v Speaker 2>we get and then ultimately as a portfolio manager, what

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<v Speaker 2>does one do as a as an investor? So we

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<v Speaker 2>think about US companies that are exposed domestically from a

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<v Speaker 2>revenue point of view as compared with companies that are

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<v Speaker 2>exporting generate most of the revenues overseas, So that is

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<v Speaker 2>an area that people as fund managers are more focused

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<v Speaker 2>and we get more questions about a domestic oriented We

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<v Speaker 2>look at companies with the exposure to anti trust and

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<v Speaker 2>what is going to be the result both of the

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<v Speaker 2>existing number of major suit lawsuits that are going on

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<v Speaker 2>now in the world of technology, and does this dissuade

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<v Speaker 2>a lot of executives from pursuing potential acquisitions as a

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<v Speaker 2>result of the current environment, And if that was to change,

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<v Speaker 2>might you find greater proclivity on the part of CEOs

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<v Speaker 2>to acquire companies? Right now, you have CEO confidence that

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<v Speaker 2>has actually increased pretty substantially, And so that's some of

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<v Speaker 2>the discussion points with clients.

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<v Speaker 1>It would be silly for me not to ask you

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<v Speaker 1>about another thing that is starting to impact markets, and

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<v Speaker 1>that is the return or lack there of the retail

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<v Speaker 1>investor is mean stock mania two point zero back.

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<v Speaker 2>Well, we have to think of the number of stocks

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<v Speaker 2>that we're really looking at. There are a group of

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<v Speaker 2>stocks relatively small in number that have a lot of

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<v Speaker 2>excitement about those but from a fundamental point of view,

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<v Speaker 2>they tend to be relatively smaller in market capitalization and

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<v Speaker 2>they don't affect the index as dramatically as some of

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<v Speaker 2>the companies in the market. We think about the big

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<v Speaker 2>flows that take place in the market, the real drivers.

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<v Speaker 2>There is household demand, there's mutual funds, foreign investors, pension funds,

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<v Speaker 2>mutual funds. These are the big ownership categories. But the

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<v Speaker 2>real net demand is coming from share repurchases on the

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<v Speaker 2>part of companies. Companies will buy back in our estimate

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<v Speaker 2>in the S and P five hundred close to a

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<v Speaker 2>little more than nine hundred billion dollars of earnings, and

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<v Speaker 2>that would be money repurchasing stock that's going to be

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<v Speaker 2>up around thirteen percent year today.

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<v Speaker 1>David, we have to leave it there, hitting up a

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<v Speaker 1>heartbreak shortly. Thank you. That is David Costin, chief US

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<v Speaker 1>equity strategist over at Goldman Sachs