The robust rally in U.S. stocks is taking place under a cloud of growing pessimism, with some prominent Wall Street strategists even telling investors to get out of the market. Goldman Sachs, by contrast, sees continued gains ahead. "We expect the US equity market will produce the greatest return through the end of 2019," the firm says in its latest U.S. Weekly Kickstart report. Specifically, the firm sees U.S. stocks dramatically outperforming other global markets by rising 14% for the rest of the year from their January 24 close, followed by a 6% gain in Japanese equities, 5% in Europe, and 3% in Asia Ex-Japan. U.S. stocks may surge even higher this year after news Wednesday that the Federal Reserve reversed its stance and will hold off on boosting rates further - for the moment.
Significance For Investors
Key to this forecast is Goldman's projection that corporate earnings growth will be better in the U.S. than in other regions even though they will slow markedly compared to a year ago, as shown by the table below.
U.S. Leads In Earnings Growth Globally
(EPS growth in 2019)
- U.S. S&P 500 Index (SPX): 6%
- Europe: 4%
- Japan: 3%
- Asia ex-Japan: 1%
Source: Goldman Sachs
Goldman's earnings forecasts run directly counter to consensus estimates, which show the U.S. will be last - and not first - in the earnings race in 2019. Compared to consensus estimates of EPS growth, Goldman is more optimistic about the U.S., but more pessimistic about the other regions. The consensus figures are 5% for the U.S., 8% for Europe, 7% for Japan, and 6% for Asia ex-Japan. "US equity analysts have slashed their 2019 profit forecasts by 200 basis points during the past four weeks and bottom-up consensus EPS growth is now 5% compared to our top-down forecast of 6%," the report notes.
Goldman's Global Market Outlook
Goldman is forecasting a year-end value of 3,000 for the S&P 500 in 2019, a gain of 14% from Jan. 24, far better than rival markets, as mentioned. Goldman recently met with fund managers in nine countries across Europe and Asia, and 75% of respondents expect flat or positive returns for global equities in 2019. Additionally, 20% indicated that the U.S. would be the best-performing market. "Conference attendees expected US stocks will post strong returns but EM [emerging markets] will lead the way," the report says.
The value of the U.S. dollar has declined by 2% on a trade-weighted basis since Nov. 2018, and this has given a boost to the earnings of U.S.-based companies with international exposure. Their exports have become cheaper to overseas buyers and their overseas earnings in foreign currencies are being translated into more dollars. Slowing economic growth in the U.S. has been a factor driving the dollar lower, the report adds. Goldman projects a further drop in the trade-weighted dollar of 4% during the next 12 months.
The report acknowledges that "risks are abundant," including declining global GDP growth and the unresolved trade conflict between the U.S. and China. Goldman forecasts that inflation-adjusted real GDP will increase by 2.4% in the U.S. during 2019, down from a 2.9% growth rate in 2018, while the figure for the world will drop from 3.8% in 2018 to 3.5% in 2019.
Continued political turmoil in the U.S., such as the budget impasse that led to a recent partial federal government shutdown, is a big risk that overhangs the U.S. economy and U.S. stocks. An upcoming fight may involve the debt ceiling, and that may pose even more risks, per a note from Bank of America Merrill Lynch. Meanwhile, investors should keep an eye on the unresolved trade conflict with China.