David Kostin’s Post

Artificial intelligence is the central risk facing US stocks. Portfolio managers have been embracing the excitement about AI and what that might mean for corporate profitability. However, investors are now shifting their focus to when companies’ investments into AI will translate into real revenue gains and earnings contributions. For now, I believe that the US equity market is fairly valued and that the trajectory of the market looks to be in line with the trajectory of earnings. Listen to the full #GSExchanges episode here: https://lnkd.in/e7qjkwEH

For equity investors, the high hurdles for the financial Olympics will take place just ahead of the July 26th opening ceremonies in Paris. Consensus expects +9% year/year EPS growth in 2Q. We expect the magnitude of EPS beats is likely to diminish as consensus forecasts set a higher bar than in previous quarters. Analysts forecast the mega-cap AI firms will post sales growth of 17% in 2Q year/year. Over a 12-month period, high-growth stocks with elevated multiples historically generated roughly the same 10 pp reward as low-multiple stocks when beating estimates. However, growth stocks with high valuations lagged the median firm by 32 pp when they failed to meet sales estimates, 2x the underperformance of lower multiple stocks.  

I recently joined CNBC's Carl Quintinella and Sara Eisen to discuss the reasoning behind the increase in the Goldman Sachs year-end 2024 S&P 500 index target to 5600 from 5200. The index has surged by 15% YTD and the big story has been that 5 stocks have accounted for nearly 60% of the gain (NVDA, MSFT, GOOGL, AMZN, and META). During the past year, consensus earnings estimates for these stocks have increased by 38% while the remaining 495 stocks have seen their earnings estimates cut by 5%. Looking ahead, we forecast a modest 2% rise in the S&P 500 index through year-end. We also discussed a few of the risks that we are monitoring as we approach the second-half of 2024: the return on investment that companies will generate on all their AI-related spending, the IPO market, and the uncertainty around the upcoming elections. You can watch the full interview below.

The first 2024 presidential debate will be held next Thursday, June 27th. Prediction markets assign a 42% probability to a Republican sweep. The policy outcomes from the election will likely impact the USD and the relative performance of equities with domestic vs. foreign sales. We analyzed company level geographic sales data in our Portfolio Passport report, which we published earlier this week. The 22% weight of Semis in our International Sales basket (GSTHINTL) has contributed to the 5 pp YTD outperformance relative to our Domestic Sales basket (GSTHAINT). Geopolitical tension and tariffs are potential headwinds to our International Sales basket, which underperformed following the 2016 election and during the 2018 trade war. 

We raise our S&P 500 year-end target from 5200 to 5600 (+3% from current level) driven by milder-than-average negative earnings revisions and a higher fair value P/E multiple (from 19.5x to 20.4x). Our 2024 and 2025 earnings estimates remain unchanged but stellar earnings growth by five mega-cap tech stocks have offset the typical pattern of negative revisions to consensus EPS estimates. We expect roughly unchanged real yields by year-end and strong earnings growth will support a 15x P/E for the equal-weight S&P 500 and a 36% premium multiple for the market-cap index.

NVDA became the 2nd largest stock in the S&P 500 this week, with its share price surpassing $1,200. The company recently announced a 10-for-1 stock split set to take effect after today’s close. Many equity investors have inquired about the impact of corporate stock splits. Based on 45 Russell 1000 stock splits since 2019, share prices typically rose by 4% in the week after the announcement, but prices did not evidence a clear reaction in subsequent weeks or around the effective date. One theory for the announcement effect is increased liquidity. However, we find that liquidity showed little change after the split took effect. Retail trading activity increased only slightly, though there were notable exceptions (AMZN, NVDA).

After an impressive year-to-date rally, the high valuations of US stocks should give investors pause. While earnings are strong, valuations are still high, which I believe is the biggest challenge for US equity investors. Watch the video below for my outlook on the investment horizon and how investment-grade and high-yield credit will enhance yield from the Goldman Sachs RIA Professional Investor Forum.

We published our Hedge Fund Trend Monitor and Mutual Fundamentals reports last week, which analyzed $6.1 trillion of equity positions at the start of 1Q 2024. Hedge funds and mutual funds have boosted exposures to equities this year, with hedge fund net leverage rising near its highest level over the past year and mutual fund cash balances dropping to record lows. In addition to higher equity exposures, funds have also begun to raise their exposures to pockets of the market that represent the next phases of the AI trade. In particular, both hedge funds and mutual funds have lifted exposures to Utilities. Among hedge fund and mutual funds’ favorite stocks, there were 7 “shared favorites”: DHR, FI, KKR, MA, UBER, V, and VRT.

I am staying strong on my S&P 500 index target of 5,200 for the end of the year, which is slightly below where we are today. The argument is that the market and investors are already incorporating into their forecasts the idea that the economy is slowing and rates are likely to get cut. In a slowing economic environment, investors tend to reward companies that return cash to shareholders through dividends and buybacks, thus making the tug of war between capex and buybacks lean more favorably toward the latter. Thanks, CNBC for having me on to discuss my year-end target, the economy, and more.