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John M. Butters

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17
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2021-04-06
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2021-04-06
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  1. “So, as a general philosophy, we have a value orientation in the way that we approach the markets, but we think that now is particularly attractive time for value stocks in general. If we think about the last couple years,”

    2021-04-06 · Goldman Sachs Exchanges · Outlook for Equity Markets · IDENTIFIED FROM THE TRANSCRIPT

  2. “That doesn't mean you'll actually be able to buy at a cheaper level because the market could first rally 15%, then pull back 10%. And so you'd actually be buying at a level 5% higher than where we stand today. And so for these reasons, we have typically advised clients who are looking to deploy new cash into the market to pick a timeframe, you know, be it three months, six months, nine months, and then allocate your capital into the market in equal installments over that period of time such that you get the benefit of averaging in. And if you do get a pullback during that window, you could accelerate that pace a bit. But again, simply waiting for a pullback, which might never come or may come at a higher level, we don't think historically has been borne out as a good strategy as a way to get invested in the market.”

    2021-04-06 · Goldman Sachs Exchanges · Outlook for Equity Markets · IDENTIFIED FROM THE TRANSCRIPT

  3. “I mean, I think it's important to keep in mind that equities are a volatile asset class. And so if we just look historically at any one year period, you've typically had at least one and a half pullbacks of 5% or more during the course of the year. And in fact, we've had seven such pullbacks or seven such 5% or more pullbacks since the market bottomed last year. And obviously none of those have upended this new bull market. I think because of that frequency of pullbacks, investors intuitively have this idea that, well, I know a pullback's coming, so I'll just wait for it and then I'll be able to buy at cheaper prices. But I think the important point to keep in mind is that those pullbacks most frequently actually happen from higher levels, meaning that the market often first rallies before it pulls back. And so there's no assurance that even if I told you there's 100% probability that we're going to have a 10% pullback at some point this year,”

    2021-04-06 · Goldman Sachs Exchanges · Outlook for Equity Markets · IDENTIFIED FROM THE TRANSCRIPT

  4. “Term average was closer to two or so when we look at the post 1996 to current average. And so again, we're still above those levels. And so we think equities are still reasonably priced given the economic backdrop today.”

    2021-04-06 · Goldman Sachs Exchanges · Outlook for Equity Markets · IDENTIFIED FROM THE TRANSCRIPT

  5. “And stable inflation are considerably lower than what we've seen in those past periods. So those past periods were typically associated with 10-year bond yield of around 4%. And today, you know, we know that 10-year bond yields are around 1.7, 1.8%. So against that backdrop, you'll recall from your finance classes all else equal a lower discount rate applied to future cash flows increases their present value and we think that's kind of where the environment we're in today And then you know earlier we let off the podcast by talking about our view on rising interest rates and I mentioned there that we often do look at the relative yield between you know stocks and bonds and when we look at that implied equity risk premium or that additional compensation that an investor earns for owning equities today as I mentioned that's still an attractive 2.9% which is high by historical standards the long”

    2021-04-06 · Goldman Sachs Exchanges · Outlook for Equity Markets · IDENTIFIED FROM THE TRANSCRIPT

  6. “Yeah, so I think that there's no question that valuations are high. We've highlighted that valuations currently stand in their 10th decile, meaning they've been cheaper, about 90% of the time historically. So on an absolute basis, it's absolutely true that stocks are richly priced. But we always have to take into context the macroeconomic environment in which those valuations exist because at the end of the day, they don't exist in isolation. And so when we've looked at past periods of low and stable inflation, which we've been in since 1996, those periods have historically supported valuations that are about 35% higher than just any unconditional period in the post-World War II era. And so we know that we're in an environment where low and stable inflation supports higher valuations. And then today, the interest rates that we have in this particular instance of”

    2021-04-06 · Goldman Sachs Exchanges · Outlook for Equity Markets · IDENTIFIED FROM THE TRANSCRIPT

  7. “Dramatically different tax regimes over those various periods of time. So we know that a change in tax levels will obviously shift earnings in one year or the next. But ultimately, economic fundamentals, not tax rates are the key driver of corporate profits. And so the market tends to look through those shifts at the end of the day. And so when we put all of that together, we think that this would obviously cause some volatility in the market, but ultimately we don't see it up ending our recommendation to stay invested or the broader bull market that we anticipate over the next multi-year economic expansion.”

    2021-04-06 · Goldman Sachs Exchanges · Outlook for Equity Markets · IDENTIFIED FROM THE TRANSCRIPT

  8. “A potential earnings growth in tow, even with the expected tax increases. And that does not include any offsetting benefits from government infrastructure spending or any tariff relief were it to come forward. We also know from speaking to a lot of political experts that they do not believe that all of those tax increases will actually get put through. So some of them will, some of them will be watered down. And so we were deducting the full amount from the conversation we were just having. We think that maybe some watered down version of that ultimately gets passed. And also any of those increases are likely to be phased in, which would spread the impact over time. More broadly, we know that just looking at the history of earnings, you know, going all the way back to the early 1900s, it's pretty remarkable that the long-term trend growth in earnings has been fairly stable at around 6%. And that's despite”

    2021-04-06 · Goldman Sachs Exchanges · Outlook for Equity Markets · IDENTIFIED FROM THE TRANSCRIPT

  9. “I think it's definitely fair to say that higher taxes represent a headwind to earnings growth. When we look at the combination of proposed tax increases, and this is just on the corporate side, under the Biden administration, our work has shown that these could shave about $13 off of consensus earnings, which for next year currently stand at around $203. So it's obviously a material potential decrement to the numbers that are expected. But we would point out a couple important caveats as we think about the impact and how the market would view this. So the first is that if you took all of those tax deductions at face value and said, okay, we're going to deduct that $13 from consensus numbers, the resulting $189 of earnings would still represent mid-single digit earnings growth from what we expect this year, which is earnings at around $180 or so. So you already have”

    2021-04-06 · Goldman Sachs Exchanges · Outlook for Equity Markets · IDENTIFIED FROM THE TRANSCRIPT

  10. “From COVID, so you can think of examples like the financials and the energy sector and the industrial sector. These are all areas which suffered last year, but which we think have a lot of upside to consensus numbers this year because in our view consensus is really continuing to underestimate the operating leverage of these companies. And so we think as the economy reopens, these companies will continue to surprise in terms of what people are expecting for earnings, and that will obviously help support.”

    2021-04-06 · Goldman Sachs Exchanges · Outlook for Equity Markets · IDENTIFIED FROM THE TRANSCRIPT

  11. “Expecting this very spirited and very sharp recovery. Obviously, we've already seen a good chunk of that in terms of this V shaped bounce off of the very depressed levels from last year. Now, that, in our view, is very supportive of continued strong earnings growth. And so as the economy reopens, as we see more widespread vaccinations, we think that the level of S&P 500 earnings is going to continue to rise, and that will provide fundamental support to the market. So when we've looked back historically, we've seen that S&P 500 earnings have grown about 7% per year in the five years that followed a new high in the level of earnings and about 10% per year during past economic expansions. And we actually think both of those conditions are applicable today. We also know that there is sizable upside to consensus earnings expectations in the hard-hit S&P 500 sectors that face significant headwinds.”

    2021-04-06 · Goldman Sachs Exchanges · Outlook for Equity Markets · IDENTIFIED FROM THE TRANSCRIPT

  12. “It's a great question. I mean, we know that expansions have been beginning longer. The last four expansions lasted nine years. We used to think about expansions as lasting five or six years. And so clearly, you know, they've been getting a bit longer. And this one is very unique in that we walked into this economic contraction with not a lot of cyclical excesses in the economy. In other words, last year when the pandemic hit, our view was that we had had an elongated cycle. And because it had grown so slow over that period, we hadn't built up the type of cyclical excesses that you typically see and which typically take a long time to expunge when you end up having a recession. So we had this very sharp health-related shock in the form of the pandemic, but the economy has been able to bounce back very quickly because we haven't had to work through all of these cyclical excesses. And so that's, you know, in addition to the fiscal stimulus and other measures that we've seen is part of the reason why we're”

    2021-04-06 · Goldman Sachs Exchanges · Outlook for Equity Markets · IDENTIFIED FROM THE TRANSCRIPT

  13. “We look back at the historical bear markets about three quarters of those have occurred during economic recessions. So again, the advent of a recession is really when you start to see very large losses in the equity market, as last year reminded us of that fact. So we think that given the low odds we're placing on a recession this year, that these investment odds still work in clients' favor to stay the course and remain with their full strategic allocation to equities. Now we also know that these gains are not limited to a single year when we've looked back historically and perhaps not surprisingly economic expansions in general have been good for stocks and we've seen over past economic expansions in the post-World War II period the average trough to peak gain for equities during those expansions is around 200% so even though we've had a rally of about”

    2021-04-06 · Goldman Sachs Exchanges · Outlook for Equity Markets · IDENTIFIED FROM THE TRANSCRIPT

  14. “Yeah, I mean, as we were just talking about the interest rate backdrop, I mean, you can point to all sorts of things, including the ongoing uncertainty of COVID, et cetera. And so there are clearly no shortage of worries. And we've continued, even given that backdrop, to recommend that clients stay invested. And part of the reason for that and really kind of the anchor reason for that is that the most important driver for stocks historically has been the economy. And if we think about the growth outlook for this year, we have penciled in a six and a half percent growth for the US economy and we think that the odds of a recession are very low at around 10%. So the reason that's particularly important is that when we've looked back in the past, we've noted that investors have enjoyed about 87% odds of a positive one year return and a much greater likelihood of large gains than large losses when the economy was in an expansion as it is now. And in fact,”

    2021-04-06 · Goldman Sachs Exchanges · Outlook for Equity Markets · IDENTIFIED FROM THE TRANSCRIPT

  15. “Standards just to give you a frame of reference back during the technology bubble in the late 1990s and early 2000s, that implied equity risk premium actually got to negative 2.0%, so negative 2%. So clearly at a plus 2.9%, we're still light years away from that, which was a real bubble. So our point is that we think that today's implied equity risk premium could really absorb a further backup in bond yields and still provide equity investors with an attractive incremental return. So for all of those reasons, we think that there's still scope for the market to absorb higher rates.”

    2021-04-06 · Goldman Sachs Exchanges · Outlook for Equity Markets · IDENTIFIED FROM THE TRANSCRIPT

  16. “GDP growth is around 1.5% versus 3%, and we still have around 2% inflation. So today we think that level of nominal growth or where the 10-year yield would exceed nominal growth is maybe a level at around 3.5%. So that's kind of the level we've been keeping in mind is that if the 10-year yield were to get up to around 3 or 3.5%, it would then be exceeding the level of nominal GDP growth. And we think that's where the market could struggle. Now clearly, you know, where we are today is still quite a long ways from that level. I think the second approach is to look at yields relative to bond yields relative to stock earnings yields. And that's what we kind of call the implied equity risk premium. And you can think about this as a proxy for the incremental compensation and investor earns for buying stocks instead of government bonds. Today, that level is around 2.9%, and that's still attractively high by historical.”

    2021-04-06 · Goldman Sachs Exchanges · Outlook for Equity Markets · IDENTIFIED FROM THE TRANSCRIPT

  17. “Well, we're definitely not of the view that the market is in a bubble, although we certainly acknowledge that there are pockets of excess in various parts of the market, but at least in our analysis, we've really thought about two ways to analyze the level of bond yields and what level might be problematic for stocks. So one is to look at the absolute level of bond yields that has caused the markets to kind of struggle in the past. And as a general rule, stocks have typically struggled when the level of the 10-year bond, its yield, exceeded the nominal growth of the economy. Now, for much of the post-World War II period, you had real GDP growth that averaged about 3% and inflation was around 2%. So nominal GDP grew at around 5%. And so when the 10-year bond yield got above 5%, that's when you really started to see stocks struggle. But we know today that real GDP growth is a lot slower. So maybe today trend real”

    2021-04-06 · Goldman Sachs Exchanges · Outlook for Equity Markets · IDENTIFIED FROM THE TRANSCRIPT