Goldman Sachs (GS) Wishes Spooz A "Happy Birthday Indeed", Says Rally Driven By Valuations Not By Profits

This week marked the eight year birthday of the Fed promoted bull market. In a late Friday note Goldman Sachs (NYSE: GS) wished Spooz a Happy Birthday while reminding clients that "the current bull market is really a tale of two sub-cycles."

Macro analyst David Kostin commented "During the first phase (March 2009 to April 2011), the market rallied on the back of a rebound in earnings from the depths of the Global Financial Crisis. Higher profits accounted for 66% of the index’s 102% gain while P/E multiple expansion explained just 17% of the rally (faster expected EPS growth contributed the remainder)."

He reminds clients that the S&P 500 has rebounded 250% from 677 on March 9, 2009 to 2365 late this week which translates into 17% annualized gain or 19% including divvy's.

This celebrated performance happened while the US nearly defaulted on it's debt. Kostin reminisced on the 2011 correction commenting "As Congress dithered over the debt ceiling, the S&P 500 plunged by 19%, just missing the 20% threshold typically used to define a bear market. Hence, some investors debate over whether the current bull market started from the low in 2009 or after the debt ceiling debacle in 2011."

However, since the 2011 correction the S&P has climbed 115%.

To wit (emphasis ours): "Since the market low of 1099 in 2011, the S&P 500 has climbed by 115%. This second phase of the bull market has lasted more than five years and has been driven mostly by an increase in valuation rather than the level of profits. The adjusted P/E multiple climbed to 18x from 10x, explaining 71% of the rise in the index. Higher earnings accounted for just 28% of the rise."

Adjusted Price-to-Earnings accounted for 71% of the rise in the index. Earnings accounted for "just 28% of the rise". Seems legit.

Alas, the recent rally is driven more by valuation (thanks to corporate buybacks) than profits.

Related Reading: MKM Partners Becomes The 4th Firm Worried About Vol And The Fed

Kostin says the S&P 500 "peaked at 2400 and will fade to 2300 by year-end." Yes, 2300 or a drop of ~3% from Friday's close in a year where we should see three rate hikes, we're told. Further, Kostin commented "...investors will soon capitulate on their expectation of upside to 2017 EPS forecasts as they face the reality that the accretive impact from tax reform will not occur until 2018. In fact, revisions to consensus EPS forecasts during the past few months have been negative for both 2017 and 2018."

Jan Hatzius, Goldman's top economist, thought Friday's job number was so strong that he moved his rate hike expectations forward from March/Sept/December to March/June/Sept. Street Insider covered those comments here.

Happy Birthday Spooz. Happy Birthday.

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