Tags: Goldman Sachs | David Kostin | stocks | investing

Goldman Strategist: Stocks Too Expensive Without Tax Cuts

Goldman Strategist: Stocks Too Expensive Without Tax Cuts
(Dreamstime)

By    |   Monday, 16 October 2017 04:05 PM

David Kostin, head U.S. strategist at Goldman Sachs, said U.S. stocks are too expensive unless the government can approve tax cuts for companies and individuals.

"While we expect the modest rebound in S&P 500 [return on equity] will continue in 2017, a substantial increase in profitability in 2018 will likely require policy tailwinds," Kostin said in a note to clients Friday. Return on equity is a measure of how profitable a stock or an index is.

Stocks keep setting records this year. The S&P 500 is up 14.3 percent in 2017 with a combination of earnings growth, a solid economy and hopes for tax cuts, CNBC reported.

By slashing corporate tax rates, the Trump administration said Monday, the average U.S. household will get an estimated $4,000 more a year. The estimate relies on research arguing that workers — rather than investors — would primarily benefit from the lower corporate rates.

Even with the positive fundamentals, the S&P 500 is currently trading in the 88th percentile of historical valuations "on a variety of metrics," including price-to-book. That measurement indicates investors are paying a high premium to own stocks.

Kostin said he expects a "modest contraction" in the index's valuation multiples with expected rate hikes from the Federal Reserve later this year.

He said energy and utilities could benefit the most from lower taxes.

"The final impact of a tax cut could change, however, depending on other provisions included in the final legislation, such as the treatment of interest deductibility," he said.

Economist Ed Yardeni predicted that a variety of market shocks could cause the walls to tumble around unprepared investors.

"Maybe the Fed will turn a lot more conservative about the bubble aspects of the market — at least rhetorically try to talk it down. Then if it starts to unwind the ETF positions, you could get something like 1987 all over again," he said.

"I'm not holding my breath because I do like to breathe. I'm not convinced we're going to get much out of Washington. There's just too much bipartisan division as opposed to agreement," Yardeni said. "The global economy is really what's driving this stock market higher. And, earnings and revenue are moving higher because the global economy is doing so well."

"''87 wasn't the end of the world. It was actually a great buying opportunity," Yardeni said.

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David Kostin, head U.S. strategist at Goldman Sachs, said U.S. stocks are too expensive unless the government can approve tax cuts for companies and individuals."While we expect the modest rebound in S&P 500 [return on equity] will continue in 2017, a substantial increase...
Goldman Sachs, David Kostin, stocks, investing
389
2017-05-16
Monday, 16 October 2017 04:05 PM
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