Tags: Goldman | 10% | S&P 500 | correction

Goldman Sachs: Stocks Likely to Suffer 10 Percent Decline

By Dan Weil   |   Wednesday, 15 Jan 2014 07:14 AM

Goldman Sachs sees a 67 percent chance that stocks will drop at least 10 percent.

The firm made the call in a market outlook obtained by CNBC. The news service didn't cite a time frame.

The Standard & Poor's 500 Index stands at a valuation that's "lofty by almost any measure," Goldman strategists wrote. The S&P 500 soared 29.6 percent last year, but it can no longer appreciate through valuation expansion, they noted.

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"We believe S&P 500 currently trades close to fair value, and the forward path of the market will depend on the trajectory of profits rather than further expansion of the forward [price-earnings] multiple from the current 15.9," Goldman strategists explained.

They say the S&P 500 price-earnings ratio has traded above 17 only twice since 1976 — in the technology bubble of the late 1990s and for four months in 2003 to 2004.

Apparently the strategists don't expect profits to rise much, because they forecast the S&P 500 will end the year at 2,100, which is higher than the 1,900 they forecast in November.

But they see the index closing 2016 at 2,200.

Other investors may agree with Goldman's view about current valuations, given the S&P 500's 1.6 percent drop so far this month.

"People have moved to the sidelines waiting for earnings to get a little more clarity," Michael O'Rourke, chief market strategist at JonesTrading in Greenwich, Conn., told Reuters.

"Fundamentals are going to have to support gains in the future," he said, noting that the Federal Reserve is tapering its bond buying.

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