Thursday, April 29, 2010

>WHERE TO INVEST NOW: Cyclical start, defensive finish

1. Economy: The US economy remains in a fragile state

– GS Economics forecasts sluggish recovery in 2010 & no Fed rate hike until 2012.
– Benefit of inventory re-stocking and fiscal stimulus ends in the middle of 2010.
– Final demand to recover gradually; unemployment to remain high into 2011.
– Excess capacity will affect inflation, interest rates, margins, and capex.

2. Earnings: Focus on 2010 pre-provision EPS of $81

– Our S&P 500 operating EPS estimates are $76 for 2010 and $90 for 2011.
– On a pre-provision and pre-write-down basis our estimates are $81 and $91, reflecting 13% annual growth.
– S&P 500 operating EPS will reach 99% of prior peak in 2011.
– Near peak EPS forecast in 2011 does not imply a new S&P 500 price level peak.

3. Valuation: We anticipate a rally to 1300 and a fade to 1250 by year-end

– P/E typically remains flat or falls slightly in the year following the market trough.
– Equity returns are primarily a function of EPS growth.
– S&P 500 currently 73% above March 2009 low and trades at 14.5x our 2010 EPS.
– Low interest rates in 1H will serve as a tailwind to push P/E toward 15x or 1300.
– Multiple expansion expected to be higher for cyclicals than defensives.

4. Money flows: A bullish back-drop for stock investors in 2010

– We estimate $600 billion of potential flows into the US equity market.
– Individuals: $350 billion of potential money flow into equities.
– Institutions: $150 billion from hedge funds and foreign investors.
– Corporations: $100 billion net flows from capital spending and equity issuance.

To read the full report: INVESTMENT