Stock Valuations Are Justified, Even in the Face of Rising Rates - Goldman

Seeking Alpha2023-07-24

Stock valuations tend to have a tough time in a rising rate environment but Goldman Sachs says there are three good reasons why that is not the case currently.The S&P 500 (SP500) (NYSEARCA:SPY) (IVV) ...

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The NTM P/E multiple in 2020 expanded by 25% alongside a 120 bp decline in the real 10-year UST yield, and then contracted by 20% in 2022 alongside a 260 bp rise in the real yield.\"\"However, this relationship has broken down since September 2022, with the S&P 500 P/E expanding by 28% despite real yields that are roughly unchanged on net,\" Kostin said. \"We believe the recent increase in equity multiples is consistent with rising yields for three reasons.\"Earnings look to have bottomed - Corporate profitability has been equally as important as real rates in explaining index valuations. Accordingly, along with rising rates, declining profitability helped explain some of the P/E compression in 2022. In recent quarters, however, S&P 500 earnings appear to have bottomed, and we expect an acceleration to 5% EPS growth in 2024.\"Growth expectations - \"Since the start of 2021, real yields have risen in 54% of weeks. Of those weeks, when the outperformance of cyclical stocks simultaneously signaled improving growth expectations, equity valuations rose by an average of 0.3%. Conversely, when yields rose alongside weakening growth expectations, the P/E multiple fell by an average of -2.0%. Intuitively, multiples rose the most when growth expectations improved and yields declined.\"AI optimism - \"The seven largest stocks in the S&P 500 (Apple (AAPL), Microsoft (MSFT), Amazon (AMZN), Alphabet (GOOGL) (GOOG), Nvidia (NVDA), Meta (META), Tesla (TSLA)) account for 28% of the market cap and have contributed 12 pp of the index’s 19% YTD total return. In aggregate, these stocks trade at an NTM P/E of 32x vs. 20x for the aggregate index. The remaining 493 firms trade at 17x. In part due to expectations that AI will be a secular tailwind for sales and margins, the P/E multiple of the top seven stocks has risen by 2 turns since the start of April despite higher rates.\"\"Our rates strategists expect that progress on a soft landing and our economists view for no Fed cuts until 2Q 2024 will lift the nominal 10-year UST yield to 3.9% at year-end before dipping to 3.75% in 2024,\" Kostin added. \"Based on our baseline macro forecasts, our model suggests the S&P 500 yield gap vs. the real 10-year Treasury will be roughly unchanged at 366 bp. The implied NTM P/E would equal 19x, slightly below the multiple today.\"\"The key upside risks to our baseline valuation forecast are that the multiples of laggards 'catch up' or that bond yields fall.\"","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":10,"commentSize":0,"repostSize":0,"favoriteSize":1,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.2","shortVersion":"4.29.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/1199915289"}