Goldman pushes back against bearish Morgan Stanley’s Mike Wilson with new 4,500 S&P 500 target

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A baby bull market is poised to keep toddling along, with equity futures indicating the S&P 500 SPX, +0.11% could push beyond 4,300 on Monday. But then much depends on the pivotal Fed meeting and inflation data.

Some fear an unexpected inflation jump could lead to an unexpected hike, while the majority is betting on calmer data that allows the Fed to skip an increase this month, and signal maybe one more hike left in this cycle.

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, 0.30% YM00, 0.12% are modestly higher, led by tech NQ00, 0.54%, with Treasury yields TMUBMUSD10Y, 3.730% TMUBMUSD02Y, 4.572% holding steady, while oil prices CL.1, -3.09% are down over 2%. The dollar DXY, -0.09% is also headed south.

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