Fund managers argue that the broad sell-off in high expected growth stocks affected some firms that in their view did not merit a de-rating. ‘Indiscriminate selling’ is the phrase that most accurately captures the view of many investors regarding the momentum drawdown since early March. We believe several quarters of 3% GDP growth and 5% year/year sales growth will lead managements to boost spending slightly above current guidance. Guidance points to year/year growth of 7%. These stocks accounted for 80% of last year’s aggregate S&P 500 capex. Nearly 250 firms have provided explicit guidance on their budgeted 2014 capex plans. Last year S&P 500 firms spent $649 billion on capex (plus an additional $231 billion in R&D). Our use of cash analysis suggests S&P 500 capex – which includes domestic and non-US spending – will rise by 9% after slim 2% growth in 2013.Ĭompany guidance on 2014 capital spending plans is consistent with our regression model and forecast. Goldman Sachs Economics expects business fixed investment, which encompasses domestic spending only, to grow by nearly 7% in 2014. Our 12-month target of 1950 reflects 4% upside from the current level.Īccelerating growth in corporate capital spending is a key component in both our economic forecast and portfolio strategy use of cash analysis. With a 16.3% ROE, the index trades at 2.7x price/book value, in-line with the trailing ten-year average and historically consistent with today’s level of profitability. Applying our interest rate estimate to the Fed Model suggests a year-end 2014 S&P 500 target of 1900. While the curve flattening, yield compression in long-term rates, and positive 5% YTD return for ten-year notes have certainly surprised most market participants, equities continue to trade around fair value and inline with the path of our forecast. Consensus expects hikes will begin in early 2015. We expect fed funds will remain unchanged until early 2016. Goldman Sachs forecasts ten-year Treasury yields will rise by 65 bp to 3.25% at the end of 2014 and climb by another 50 bp to 3.75% by end-2015. Furthermore, growth is anticipated to remain above 3% for the balance of 2014 and throughout 2015, 20. Looking ahead, our economists forecast US GDP growth will climb to 3.0% beginning in the current quarter (2Q) while inflation will remain low. Our ‘Sudoku’ bond model suggests ten-year US Treasuries are fairly valued relative to the expected level of short-rates, growth and inflation. Demand for long-term Treasuries by private pensions may also have been a factor. Realized US GDP growth in 1Q was just 0.1%, well below consensus expectations of nearly 3% at the start of the year. Goldman Sachs interest rate strategy believes the recent yield curve re-shaping is consistent with the downward revision in the US growth and inflation outlook. There is no precise answer to why ten-year US Treasury yields have declined by 40 bp since the start of the year to 2.6%. Rotation: The potential for the momentum drawdown of the past two months to reverse and vault high expected sales growth companies back into a market leadership position.Capex: the outlook for corporate capital spending in 2014 and.Interest rates: The recent decline in ten-year US Treasury yields to 2.6%, the forward path of interest rates, and implications for equity valuation.So in this difficult market, and confusing – for traders, and everyone else – environment, what are the three main questions posed by Goldman’s clients had? According to David Kostin, “Three questions dominated our investor dialogue this week given the lack of meaningful data releases. Simply put, 2014 has been a difficult equity investment environment at both the macro and micro levels. Individual sector return dispersion also remains extremely low. One-month and three-month S&P 500 return dispersions stand at the 5th and 1st percentile relative to the past 30 years. Realized volatility has remained low since the start of the year. S&P 500 moved sideways for yet another week, ending virtually unchanged at 1878.
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