One reason stocks advanced sharply last week was a Goldman Sachs strategist’s statement that he was growing more optimistic and jacking up his forecast for the S&P 500 this year to 1500.
This higher target from David Kostin was based on Goldman’s new estimate for the earnings of the large companies that make up the benchmark index. He forecast that they would earn $84 a share as a group when the final tallies for 2010 were counted, and $96 in 2011. The latter figure would set a record for the S&P 500 over a 12-month period.
Note that the estimate is that earnings will rise 14.2%, but that stocks will rise 17% from the current 1280 level. The difference is an expectation for a higher price/earnings multiple as a result of growing confidence in the earnings improvement, plus lower volatility and inflation. That’s a high bar.
Kostin also went out on a limb to set a target of 1325 by the end of March and a target of 1400 by the end of June. If he’s right, it would require sharp trajectories from current levels. Thus any declines between here and there would be brief and shallow.
The prediction took the market by surprise, as it is an outlier. JP Morgan strategist Thomas Lee reiterated his own view that the index would close 2011 at 1425, and also reminded investors of his call that a sharp correction in the March-April area would “burn off short-term excess bullishness.”
Should we pay attention? My view on the long term hasn’t changed in two years. The money that poured into the system via fiscal and monetary stimulus has been three times the amount poured into the system in the early 1990s following the last housing debacle and recession. The 1991-1993 period was a lot like 2009-2010, riddled by fear of a follow-on recession, a high foreclosure rate and lingering joblessness amid a weak recovery.
Yet ultimately the money flood worked its magic, seeping into the membrane of the global financial machine. Fired middle managers started new companies. This thing called the Internet began to take shape. Ordinary people bought personal computers for the first time, and began to regularly upgrade. Clunky, pricey boxes called “car phones” emerged, and the video game industry launched.
Periods in which jobs are hard to get are amazingly fertile. People get very creative when they can’t just join General Mills (NYSE:GIS) out of college and begin a marketing career. They start something, and if that fails they start something else. They scrape, and save and move.
The dawn of the social networking revolution, and the mobile Internet, is to this generation what the launch of the consumer Web was to the 1990s, and I think we are going to see a lot of lucrative companies emerge that spin off and ignite others. And if people can’t find a job at home, they will emigrate to Shanghai, North Dakota, Chile, Angola or someplace that new job opportunities await.
They will learn new languages and new customs, and found new communities. Everyone who has traveled through South America marvels at the number of brilliant Lebanese, Syrians, Chinese and Americans who have built great businesses and have become closely woven into the fabric of their new homes for generations. Cross-pollination plants the seed of future growth. It’s the same in this country, even if it’s just a move from the deserts of Arizona to the frozen oilfields of the Dakotas.
Speaking of historical parallels, the 1990s market really got traction after the Republicans took over the House in 1995 and never looked back, as you can see in the chart above. If you were there, you know what I’m talking about: Jobs were hard to get, government was held in low esteem, Europe was coming apart at the seams in Bosnia and Croatia, and in a few years the Russian and Asian currencies would blow up. Really, it seemed like a very unlikely time for stocks to advance.
Yet U.S. companies, driven by ambition and need, drove forward. Dell (NASDAQ:DELL) shares rose 70,000% in the decade, EMC (NYSE:EMC) rose 40,000%, and some little companies called Amazon.com (NASDAQ:AMZN) and Cognizant Tech (NASDAQ:CTSH) got underway. And don’t even talk to me about oil drillers: Occidental (NYSE:OXY) and EOG Resources (NYSE:EOG) were trading at $6-$8 for most of the 1990s; they’re both pushing $100 today with no change in strategy. Ultra Petroleum (NYSE:UPL) went from $1 to $100, though it’s back to $50 now. The refiner Holly (NYSE:HOC) was $3 in most of the ’90s and went to $75.
The bottom line is that we need to use periods of uncertainty like this to rev our engines and dream a little with the Goldman forecaster. My forecast is for 3330 on the S&P 500 by December 2020, which used to sound high but it’s now only 162% above the current level.
Sure, 162% is still a lot, but maybe not as much as you think. Amazon is up 234% by itself in the past two years. Staid old Dow Chemical (NYSE:DOW) is up 135% in the past two years. And I haven’t even mentioned yet firecrackers like some of our favorites, such as a F5 Networks(NASDAQ:FFIV), +474% in the past two years, or Cognizant, +275%, or smaller companies on our list like Balchem (NASDAQ:BCPC), +130%, or Cavium (NASDAQ:CAVM), +350%.
This will happen again whether or not there’s a 3% to 5% correction around the bend in the next month. Capital markets rise to fill the needs of growing populations, which is what we have in the U.S. and U.K., not to mention emerging markets. We’ll learn to use less carbon and pollute less along the way because we have to, and those will be new industries. This year marks the start of the first commercially available electric cars, and they will become more common. It’s not a pipe dream, it’s just innovation and the business cycle. Count on it.
For more insights like this, check out Jon Markman’s daily trading newsletter, Trader’s Advantage, and long-term investment letter, Strategic Advantage.
