Market Headed Higher ... Much Higher

How high is up? Pretty high, as a matter of fact.

Over the next several years, most people are going to be surprised at the stock market's gains. At least that's my view. And it's also becoming the view of many of the so-called market "experts" as well.

Goldman raises S&P 500 targets through 2015 is an optimistic but realistic forecast of market conditions through 2015. At least that's how I see things:

"Improving economic growth, rising dividends and potentially low interest rates. It’s all good for Wall Street and the stock market.

That’s according to Goldman Sachs, which is taking an ever increasingly bullish view on the S&P 500 with some target lifting in a note dated May 20. As they’ve previously said, their upbeat S&P 500 outlook for this year has played out faster than they expected:

“We are raising our S&P 500 dividend estimates and index return forecasts for 2013 through 2015. We expect S&P 500 index will rise by 5% from the current level to 1,750 by year-end 2013, advance by 9% to 1,900 in 2,014, and climb by 10% to 2100 in 2015.”

A team led by David Kostin, chief U.S. equity strategist at Goldman Sachs, says a big reason for the target lifts is due to expectations the U.S. economy will achieve above-trend real GDP growth in 2014, ending a six-year period of economic “stagnation.” And in developed economies, the final year of economic stagnation before GDP growth has been linked to price/earnings multiple expansions averaging 15%, note the strategists. They expect the S&P 500 p/e multiple will continue to rise, reaching 15 times at year-end 2013 and 16 times by the end of 2014.

That S&P 500 forward p/e multiple has risen by 30% in 12 months to 14.6 times from 11.4 times, an increase that’s been bigger and faster than Goldman’s baseline forecasts assumed (Goldman recently cautioned that the S&P wasn’t cheap), but it’s still in line with what happened in the post-1990s, so they aren’t overly concerned. The S&P 500 forward p/e multiple has averaged 12.9 times since 1978 and 15.3 times since 1990, Goldman notes.

As for S&P 500 dividends, they expect those to rise by roughly 30% between 2013 and 2015, with growth of close to 11% for 2013 and 2014 and 9% in 2015. Goldman has been pushing dividend stocks, and in a note from May 17, Goldman pointed out that dividend-paying stocks are among the few income-generating investments in the U.S. . . .

Changes to the S&P 500 forecasts reflect a one price/earning multiple point premium to fair-value estimates. And that, they say, is due to increased confidence over a medium-term outlook for the U.S., improved investor risk appetite and the wide gap between equity and bonds that they expect will be closed more by stocks than bonds.

And if the Fed can stay committed to monetary easing and the Bank of Japan keeps up its aggressive stance and Europe growth stays weak, U.S. Treasury yields may remain low. And even if U.S. Treasury yields rise, the S&P 500 will still continue to perform as long as those higher rates stem from an improved economic growth view. If interest rates remain low despite better growth, then upside to the S&P 500 could be even bigger.

Speaking on CNBC earlier on Tuesday, Sheila Patel, head of international at Goldman and tipped to replace Jim O’Neill, said they expect a “gradual rotation” from bonds to stocks, and money will move back into equities eventually."


Summing Up

Things look good due to such things as historically low interest rates, the genuine prospects of North American energy independence, falling commodity prices worldwide, an improving U.S. economy and jobs market, the possibility of a smaller and less intrusive government (because of the current IRS and related spotlights on government) and an increasingly confident private sector, all of which contribute to my optimistic assessment of the investment and economic scenario for the next several years.

For savers and individual investors, it's time to take notice and enjoy the ride.

Thanks. Bob.