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US Weekly Kickstart
Portfolio Strategy Research
Improving economic growth will benefit stocks with high operating leverage
The Current Activity Indicator (CAI) has slowed to 1.3% but we expect GDP growth will accelerate to 2.3% in 2H. Firms with the
highest operating leverage will benefit most from improving activity and the associated pickup in sales growth. Since February, our
high operating leverage basket (GSTHOPHI) has returned 23% vs. 17% for low operating leverage (GSTHOPLO). This trend should
persist. However, improving economic growth brings with it the risk of wage inflation and margin headwinds. Low Labor Cost firms
typically beat High Labor Cost firms when wages rise, but the pattern has not been exhibited recently. This trend should reverse.
Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a
conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non-US
affiliates are not registered/qualified as research analysts with FINRA in the U.S.
Conversations we are having with clients: Operating leverage and wage inflation
Strategically, we expect S&P 500 will rise during the next several years S&P 500 sales growth and DOL tend move in opposite directions. Falling
as the US economy slowly expands at a roughly 2% annual pace. Sales and sales increases the weight of fixed costs versus variable costs and vice versa.
earnings will increase but the P/E multiple will decline as the Fed tightens. At As sales growth decelerated during the last year, operating leverage jumped.
2097, S&P 500 stands only 1.6% below its May 2015 all-time high of 2131. S&P 500 sales fell by nearly 4% in 2015, while operating leverage increased
Our year-end 2016 target of 2100 reflects a flat price return from the current from 2.7 at the beginning of 2015 to its current level of 2.9. We expect S&P
level. The index should climb to 2200 by the end of 2017 (+5%) and reach 500 sales to grow modestly (+2%) in 2016 and rise by roughly 6% in 2017. As
2300 by the end of 2018 (+5%). We expect the forward P/E will decline by 9% sales growth improves, operating leverage should decline. Operating
during the next six months from the current 17.2x consensus bottom-up EPS leverage is highest in Health Care and lowest in Materials and Energy.
to 15.7x at year-end 2016 (top down P/E will fall by 7% from 18.4x to 17.1x).
Low operating leverage stocks outperformed high operating leverage
Tactically, the risk of a 5%-10% drawdown to 1900-2000 remains a near- from June of 2014 to February of 2016 by 800 bp (-2% vs. -10%; S&P 500
term concern. Potential catalysts include a tightening Fed, US Presidential returned -3%). However since mid-February, our 50-stock sector-neutral high
election uncertainty, seasonal buyback deceleration, and a starting point of operating leverage basket (ticker: GSTHOPHI) has returned 23%, outpacing
elevated valuation. Collectively, these factors create an asymmetric our low operating leverage basket (GSTHOPLO) (+17%) by 600 bp (S&P 500
risk/return trade-off. Futures imply a 18% likelihood of a July hike while GS returned 17% during the same time period). We expect this trend will persist.
Economics assigns a 35% probability. The buyback window closes mid-
Improving economic growth brings with it some risks for stocks as well.
June: By the end of next week roughly 50% of stocks in the S&P 500 will be
Persistently slow wage growth has helped lift corporate profit margins to
in a blackout period and 75% will be on the sidelines by June 20, just ahead
record levels this cycle. But wages have begun to accelerate and will
of the Brexit vote on June 23. During the six drawdowns greater than 5%
become an increasing headwind to profits. During the last five years, wages
that have occurred during the last four years, the S&P 500 forward P/E has
have grown at an annual rate of 2%, well below the 30-year average of 3%.
troughed at an average of 15x, which on expected EPS implies a level of 1900.
(See the June 7 report for strategies to manage equity drawdown risk). However, US wages are escaping their stagnation. The Goldman Sachs
Economics wage tracker now stands at 2.8%, the fastest rate since 2008.
Client discussions this week focused on economic growth, operating
Growth in Unit Labor costs was revised up to 3.0% on a year/year basis.
leverage, and wage inflation. The Goldman Sachs Economics US Current
Compensation growth per hour was revised up to 3.7%.
Activity Indicator (CAI) is a proxy for real-time GDP growth and the metric
has slowed to 1.3%. Our economics colleagues expect GDP growth will Rising labor costs will weigh on S&P 500 EPS and have a differentiating
accelerate to a 3.2% pace in 2Q and average 2.3% during 2H 2016. effect on the profits and performance of US equities. Sectors with labor-
intensive businesses and already-low margins such as Industrials and
Companies with the highest operating leverage stand to benefit most
Consumer Discretionary appear most vulnerable. Although rising wages
from accelerating GDP growth and the associated pickup in sales
should be a net negative for US corporate profits, we also identify some
growth. Conversely, investors who fear the economy is decelerating and
parts of the equity market that may benefit from the trend. Our Low Labor
view last weeks dismal 38K jobs report as a harbinger of weakening activity
Cost (GSTHLLAB) and High Labor Cost (GSTHHLAB) baskets each consist of
should own stocks with the lowest degree of operating leverage.
50 S&P 500 stocks, on a sector-neutral basis, with the highest and lowest
A company with a high degree of operating leverage has high fixed estimated US labor costs as a share of revenues (25% vs. 3%). Both intuition
costs relative to variable costs. We calculate each companys degree of and our historical analysis suggest that Low Labor Cost firms typically
operating leverage (DOL) as the ratio of revenue after variable operating outperform High Labor Cost firms during periods of rising wages. However,
costs to revenue after variable and fixed operating costs [DOL = (Sales this pattern has not been exhibited during the past year as Low Labor Cost
COGS) / (Sales COGS SGA Depreciation)]. Operating leverage has firms have trailed by 130 bp QTD and by roughly 400 bp YTD. The debate
trended down since 1990, but recently has risen to the long-term average. around income inequality has kept wages in the headlines and we expect
the pattern will reverse and High Labor Cost firms will soon underperform.
Revenue Growth
10
3.0 3.0
2.5 5
2.5
2.0 0
1.5 (5)
1.3% Revenue 2.0
1.0 Growth GS
(10) Revenues declining Forecast
0.5 Operating leverage (LHS)
1.5
(15) declining
0.0
May-14
Jul-14
Sep-14
Nov-14
Jan-15
Mar-15
May-15
Jul-15
Sep-15
Nov-15
Jan-16
Mar-16
May-16
Jul-16
(20) 1.0
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
Source: Goldman Sachs Global Investment Research. Source: Compustat and Goldman Sachs Global Investment Research.
Exhibit 3: GS Wage Tracker at 2.8%, highest level since 2008 Exhibit 4: Performance of operating leverage and wage inflation baskets
as of June 9, 2016 as of June 9, 2016
10% 105
102
101
6%
100
99 Low <GSTHLLAB> vs.
High <GSTHHLAB>
4% 98 Labor Cost
2.8% 97
96
2%
95
94
0%
Mar-16
May-16
Jul-16
Jan-16
Feb-16
Apr-16
Jun-16
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
2020
Source: Goldman Sachs Global Investment Research. Source: Factset and Goldman Sachs Global Investment Research.
Health Care (22% of the Basket) Telecommunication Services (4% of the Basket)
Allergan plc AGN $ 98 (8)% (8)% 11.4 CenturyLink Inc. CTL $ 15 (9)% (2)% 3.6
Bristol-Myers Squibb BMY 121 27 12 6.0 AT&T Inc. T 247 6 12 3.2
Boston Scientific BSX 31 17 9 4.6
Eli Lilly & Co. LLY 82 3 5 4.5 Basket Median (1)% 5% 3.4
Henry Schein Inc. HSIC 15 10 9 4.2 Sector Median (2) 2 2.9
Abbott Laboratories ABT 57 1 3 3.8
DENTSPLY SIRONA XRAY 16 81 44 3.8
PerkinElmer Inc. PKI 6 6 3 3.6
Agilent Technologies A 15 8 4 3.5
Mallinckrodt MNK 7 6 2 2.0
Health Care
ESRX Express Scripts Holding $49 (12)% 100 % $40 26 $102 1% 12 x
ABC AmerisourceBergen 17 (26) 100 112 18 139 1 14
GILD Gilead Sciences 117 (15) 73 124 8 33 2 7
CAH Cardinal Health 26 (11) 96 112 35 112 3 14
MCK McKesson Corp. 43 (5) 80 112 70 189 3 14
ALXN Alexion Pharmaceuticals 31 (28) 34 124 3 3 5 25 Low Labor Cost Basket Median 26 2 42 83 13 13 3 14
CELG Celgene Corp. 83 (11) 58 124 7 9 5 18 S&P 500 Median 18 7 71 84 20 9 11 18
Health Care
UHS Universal Health Svc. $12 16 % 100 % $60 75 $9 49 % 18 x
THC Tenet Healthcare 3 (1) 100 60 135 19 43 15
DGX Quest Diagnostics 11 12 98 59 44 7 34 15
HCA HCA Holdings Inc. 32 20 94 60 233 40 33 13
LH Laboratory of America 13 6 95 59 50 9 32 15
DVA DaVita HealthCare Partners 16 11 100 67 60 14 29 19 High Labor Cost Basket Median 14 7 89 75 23 6 25 18
MYL Mylan 22 (15) 58 124 35 9 27 9 S&P 500 Median 18 7 71 84 20 9 11 18
Dec-13
Dec-14
Dec-15
Dec-16
Dec-17
Dec-18
Dec-19
Dec-13
Dec-14
Dec-15
Dec-16
Dec-17
Dec-18
Dec-19
2004
2008
2012
2016
2020
2024
Sentiment Indicator Rotation Index Volatility
100 (2.0) 44
>90 = HIGH net positions Risk on; favors EQUITY flows
VIX
(1.5) 40
S&P 500 Futures Sentiment
80
36
Standard deviations
(1.0)
6-month
trend 32
60 (0.5)
28
0.0
30 24
40
0.5
Rotation Index 20
Sentiment (4-wk moving avg)
1.0
20 Indicator (SI) 16
15
1.5
12
<10 = LOW net positions Risk off; favors BOND flows
0 2.0 8
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
Mar-16
Jun-16
Sep-16
Jun-14
Jun-15
Jun-16
Dec-13
Mar-14
Sep-14
Dec-14
Mar-15
Sep-15
Dec-15
Mar-16
Sep-16
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
Mar-16
Jun-16
Sep-16
Note: Sentiment Indicator ranks net futures positioning versus the past 12 months. Readings Note: Rotation Index plots the first principal component of weekly reallocation activity
below 10 or above 90 indicate extreme positions that are significant in predicting future returns. across equity and debt mutual fund categories as a measure of retail risk appetite.
Source: Haver, Lipper, FactSet, CFTC, and Goldman Sachs Global Investment Research.
(20) (10) 0 10 20 30 40 50 60 (1.5) (1.0) (0.5) 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5
Source: Haver, Lipper, FactSet, and Goldman Sachs Global Investment Research.
98 112 100
104
110
96 99
108 102
94 98
106
100
92 104 97
102
98
90 96
100
88 98 96 95
Jun-14
Jun-15
Jun-16
Jun-14
Jun-15
Jun-16
Jun-14
Jun-15
Jun-16
Jun-14
Jun-15
Jun-16
Dec-13
Mar-14
Sep-14
Dec-14
Mar-15
Sep-15
Dec-15
Mar-16
Sep-16
Dec-13
Mar-14
Sep-14
Dec-14
Mar-15
Sep-15
Dec-15
Mar-16
Sep-16
Dec-13
Mar-14
Sep-14
Dec-14
Mar-15
Sep-15
Dec-15
Mar-16
Sep-16
Dec-13
Mar-14
Sep-14
Dec-14
Mar-15
Sep-15
Dec-15
Mar-16
Sep-16
Domestic Cyclicals Global Cyclicals Domestic Defensives Global Defensives
104 104 120 118
GSSBDCYC GSSBGCYC GSSBDDEF GSSBGDEF
102 102 115
115
100
100
112
98
98 110
109
96
96
94 105 106
94
92
103
92 Autos 100 FoodRetailing
90 HealthCare
CapitalGoods 100
Banks 90 Energy RealEstate ConsumerDurables
88 Retailing
Financials Materials 95 ConsumerServices
Insurance TechHardware Professional Services 97 Food,Beverage&Tobacco
86 88
Media Semiconductors Telecom Household&PersonalProducts
Transportation Software Utilities Pharmaceuticals
84 86 90 94
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
Mar-16
Jun-16
Sep-16
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
Mar-16
Jun-16
Sep-16
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
Mar-16
Jun-16
Sep-16
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
Mar-16
Jun-16
Sep-16
Source: FactSet and Goldman Sachs Global Investment Research.
100
95
90
95
85
80
90
75
DEFENSIVES DOMESTIC
outperforming outperforming
70 85
Mar-14
Mar-15
Mar-16
Dec-13
Jun-14
Sep-14
Dec-14
Jun-15
Sep-15
Dec-15
Jun-16
Sep-16
Mar-14
Jun-14
Sep-14
Mar-15
Mar-16
Dec-13
Dec-14
Jun-15
Sep-15
Dec-15
Jun-16
Sep-16
Performance and fundamentals of our sector baskets
Bloomberg % of
Ticker # of S&P 500 Non-US Earnings Growth Sales Growth NTM LTM Div Total Return
Basket <GSSBXXXX> Stocks Cap Beta Sales 2016E 2017E 2016E 2017E P/E P/B Yield 1 Wk 1 Mo 3 Mo LTM YTD
Global GLBL 263 59 % 1.0 49% (2)% 16 % (2)% 8% 18.6x 3.6x 2.2 % 0.9 % 4% 7% 4% 5%
Domestic DOMS 237 41 0.9 16 4 11 7 5 15.4 2.1 2.1 (0.1) 2 7 4 4
Global Cyclicals GCYC 179 39 % 1.1 49% (6)% 19 % (3)% 8% 18.9x 3.2x 2.1 % 1.2 % 5% 8% 3% 6%
Domestic Defensives DDEF 145 23 0.8 12 7 9 7 6 18.6 3.5 2.2 1.1 2 7 13 7
Global Defensives GDEF 84 21 0.9 47 5 10 2 5 18.1 5.0 2.3 0.3 2 5 6 3
Domestic Cyclicals DCYC 92 18 1.0 23 1 12 2 5 12.6 1.4 1.9 (1.5) 2 7 (5) 0
S&P 500 500 100 % 1.0 33% 14 % 17 % 4% 6% 17.2x 2.8x 2.1 % 0.5 % 3% 7% 4% 5%
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
Mar-16
Jun-16
Sep-16
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
Mar-16
Jun-16
Sep-16
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
Mar-16
Jun-16
Sep-16
Consumer Staples 10 8
Energy 7 16
Underweight
Industrials Energy Materials Utilities 3 18
102 120 104 Materials 3 11
S&P 500 100% 5%
100 110 100
98
100 96
96
90 92
94
80 88
92
70 84
90
88 60 80
86 50 76
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
Mar-16
Jun-16
Sep-16
Jun-14
Jun-15
Jun-16
Dec-13
Mar-14
Sep-14
Dec-14
Mar-15
Sep-15
Dec-15
Mar-16
Sep-16
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
Mar-16
Jun-16
Sep-16
Consumer Staples Health Care Telecommunication Services Utilities
120 130 115 130
96 100 90 100
92 95 85 95
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
Mar-16
Jun-16
Sep-16
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
Mar-16
Jun-16
Sep-16
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
Mar-16
Jun-16
Sep-16
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
Mar-16
Jun-16
Sep-16
D Technology Hardware & Equipment 1.6 (0.7) 8.9 2 (13) 1 Global Cyclicals
S Health Care Equipment & Services 1.4 2.3 4.0 11 5 7 Domestic Defensives
O Automobiles & Components (0.2) (0.6) 0.5 2 (13) (6) Global Cyclicals
Pharmaceuticals Biotechnology & Life Sciences (1.1) 2.4 3.1 7 (3) (2) Global Defensives
115
105
110
100 105
100
95
95
Value outperforming
90 Russell 2000 outperforming
90
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
Mar-16
Jun-16
Sep-16
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
Mar-16
Jun-16
Sep-16
Sectors: Russell 1000 Growth vs. Value Sectors: Russell 1000 vs. Russell 2000
Weight (%) 1-Week (% Return) YTD (% Return) Weight (%) 1-Week (% Return) YTD (% Return)
Russell Sector Growth Value Growth Value (bps) Growth Value (bps) Russell Sector R1000 R2000 R1000 R2000 (bps) R1000 R2000 (bps)
Financials 10 28 (0) (2) 162 5 (1) 587 Health Care 14 14 (0) (1) 38 0 (9) 961
Energy 1 14 4 3 79 7 15 (824) Consumer Staples 9 3 2 1 23 8 8 12
Consumer Staples 11 6 2 1 40 8 8 (12) Utilities 6 5 3 3 (7) 18 16 180
Industrials 12 10 2 2 30 8 7 40 Industrials 11 13 2 2 (16) 8 9 (161)
Cons Discretionary 22 6 (0) (0) 20 2 3 (167) Cons Discretionary 14 14 (0) 0 (70) 2 3 (97)
Technology 22 11 0 0 20 0 5 (456) Technology 17 15 0 1 (84) 2 5 (315)
Utilities 2 10 2 3 (37) 15 18 (299) Financials 19 27 (1) 0 (125) 1 6 (523)
Materials 4 3 1 3 (160) 9 19 (965) Materials 4 7 2 3 (180) 13 19 (564)
Health Care 16 12 (1) 1 (275) (4) 7 (1,146) Energy 7 3 3 6 (268) 15 10 516
Index 100 100 0 1 (35) 3 7 (395) Index 100 100 1 1 (43) 5 5 (10)
Domestic Sales 3 Hedge Fund "VIP" List GSTHHVIP (0.0)% 4% (2)% 19x 3.6x 1.0 %
Hedge Fund Very Important Shorts GSTHVISP 1.0 3 6 16 3.1 2.7
Strong Balance Sheet 2
High Hedge Fund Concentration GSTHHFHI 2.0 8 13 19 2.6 0.0
Buyback 1
Low Hedge Fund Concentration GSTHHFSL 2.1 3 11 20 4.4 2.8
Total Cash Return to Shareholders 1 Mutual Fund
Mutual Fund Overweight Positions (0) High Sharpe Ratio GSTHSHRP 0.8 % 5% 12 % 16x 3.1x 1.9 %
Dual Beta (2) Mutual Fund Overweight Positions GSTHMFOW (0.8) 3 (0) 18 3.9 1.5
Hedge Fund "VIP" List (2) Mutual Fund Underweight Positions GSTHMFUW 1.1 1 7 19 3.2 3.1
Overseas Earnings GSTHSEAS 0.7 3 7 17 2.9 2.6
(6) (4) (2) 0 2 4 6 8 10 12 14 16
S&P 500 0.5 % 3% 5% 17x 2.8x 2.1 %
S&P 500 Average 20 5.1 2.0
S&P 500 Median 18 3.0 2.0
For details and constituents of our baskets see Strategy Baskets: Anatomy of our US Portfolio Strategy Thematic and Sector Baskets, September 10, 2015.
70 80 96 84
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
Mar-16
Jun-16
Sep-16
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
Mar-16
Jun-16
Sep-16
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
Mar-16
Jun-16
Sep-16
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
Mar-16
Jun-16
Sep-16
High vs. Low High vs. Low
Operating Leverage Tax Rate BRICs Sales Western Europe Sales
108 120 104 104
GSTHOPHI/ GSTHHTAX/ GSTHBRIC GSTHWEUR
GSTHOPLO GSTHLTAX 102
106 102
115 100
104
98 100
110
102 96
98
94
100 105
92
96
98 90
100
88 94
96
95 86
94 92
84
92 90 82 90
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
Mar-16
Jun-16
Sep-16
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
Mar-16
Jun-16
Sep-16
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
Mar-16
Jun-16
Sep-16
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
Mar-16
Jun-16
Sep-16
Source: FactSet and Goldman Sachs Global Investment Research.
104 103
100 101
98 100 98
100
96
99
96 98 94
92 98
94 96 90 97
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
Mar-16
Jun-16
Sep-16
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
Mar-16
Jun-16
Sep-16
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
Mar-16
Jun-16
Sep-16
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
Mar-16
Jun-16
Sep-16
Strong vs. Weak
High Quality Balance Sheet Buybacks Dividend Yield & Growth
104 106 103 104
GSTHQUAL GSTHSBAL/ GSTHREPO GSTHDIVG
104 GSTHWBAL 102
103 102
101
102
102 100
100
100
101 98
99
98
100 98 96
96
97
99 94
94
96
98 92
92
95
97 90 90
94
96 88 93 88
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
Mar-16
Jun-16
Sep-16
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
Mar-16
Jun-16
Sep-16
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
Mar-16
Jun-16
Sep-16
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
Mar-16
Jun-16
Sep-16
Source: FactSet and Goldman Sachs Global Investment Research.
98 101 96 102
96
100 94
100
94
99 92
92
98
98 90
90
88 97 88 96
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
Mar-16
Jun-16
Sep-16
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
Mar-16
Jun-16
Sep-16
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
Mar-16
Jun-16
Sep-16
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
Mar-16
Jun-16
Sep-16
High Concentration Low Concentration High Sharpe Ratio Earnings Held Overseas
125 112 112 104
GSTHHFHI GSTHHFSL 111 GSTHSHRP GSTHSEAS
110 110
120 109 102
108 108
107
115 106 100
106
105
104
104
110 98
103
102
102
101
105 100 96
100
98 99
100 98 94
96 97
96
95 94 95 92
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
Mar-16
Jun-16
Sep-16
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
Mar-16
Jun-16
Sep-16
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
Mar-16
Jun-16
Sep-16
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
Mar-16
Jun-16
Sep-16
Source: FactSet and Goldman Sachs Global Investment Research.
GS Top-Down EPS vs. Consensus Bottom-Up Earnings & Sales Revisions (Consensus)
EPS REVISIONS SALES REVISIONS
Operating EPS Adjusted EPS
1 month 3 month 1 month 3 month
(GS Top-Down) (Consensus Bottom-Up)
16E 17E 16E 17E 16E 17E 16E 17E
Contribution EPS growth Contribution EPS growth
2016E 2017E 2016E 2017E 2016E 2017E 2016E 2017E Energy 1.1 % 1.0 % (18.6)% (2.0)% 2.7 % 0.4 % 0.4 % 0.4 %
Utilities $4 $4 26 % 4% $4 $4 5% 3% Consumer Staples 0.4 0.3 0.9 0.9 0.1 0.1 (0.2) (0.3)
Telecom Services 4 4 13 2 4 4 6 1 Materials 0.2 (0.2) 2.3 0.4 (0.0) (0.6) (0.0) (1.2)
Financials 26 29 9 10 25 28 4 13 Information Technology 0.1 0.1 (2.7) (2.9) 0.4 0.5 (0.9) (1.0)
Consumer Discretionary 14 15 9 6 14 16 10 12 S&P 500 (0.2) (0.3) (1.5) (1.1) 0.3 0.1 (0.1) 0.0
Health Care 16 17 9 6 19 20 8 5 Consumer Discretionary (0.2) (0.4) 0.7 0.1 (0.1) (0.1) 0.6 1.0
Consumer Staples 10 10 6 1 10 11 2 10 S&P 500 ex. Energy (0.2) (0.3) (1.2) (1.1) 0.1 0.1 (0.1) (0.1)
S&P 500 NTM P/E S&P 500 Cost of Equity = ERP + 10-yr UST
30 10.0
25
P/E Cost of
NTM P/E (x)
20 Equity
17.2 8.0
15 7.5%
10
5
10-yr rolling avg 6.0 ERP
5.8%
0
1/76 1/81 1/86 1/91 1/96 1/01 1/06 1/11 1/16 1/21
4.0
10 Year
S&P 500 LTM P/B 2.0 UST
1.7%
6
5
P/B 0.0
LTM P/B (x)
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
Mar-16
Jun-16
Sep-16
3 2.8
2
10-yr rolling avg
1
We estimate the equity risk premium (ERP) using our DDM framework to model expected future cash flows.
0
1/76 1/81 1/86 1/91 1/96 1/01 1/06 1/11 1/16 1/21 We solve for the cost of equity that implies the market is at fair value and then deduct the 10-year US treasury.
Current aggregate valuation metrics - absolute Current relative valuation vs. 10-year average (Z-score)
EV/ EV/ Price/ FCF PEG NTM EV/ EV/ Price/ FCF PEG Median
Sales EBITDA Book Yield Ratio P/E Sales EBITDA Book Yield P/E Ratio Z-Score
S&P 500 2.1x 11.1x 2.8x 4.5 % 1.4x 17.2x S&P 500 2.1 1.5 1.0 1.0 1.9 0.7 1.3
Energy 2.1 16.4 1.8 (1.0) 2.0 52.4 Financials NM NM (0.8) NM (0.9) 0.4 (0.8)
Consumer Staples 1.7 13.2 5.3 4.6 2.4 21.2 Information Technology (0.5) (1.2) (1.1) (0.6) (0.4) 0.7 (0.6)
Utilities NM 10.0 1.9 (0.6) 3.1 18.0 Consumer Discretionary (0.1) (1.9) 1.3 (0.0) (0.8) (1.1) (0.5)
Consumer Discretionary 1.7 9.8 4.8 4.1 1.0 17.9 Utilities NM (0.7) (0.2) (0.1) (0.4) (0.3) (0.3)
Materials 2.1 12.8 3.5 3.6 1.9 17.4 Health Care (0.6) 0.1 0.4 0.4 (0.8) (0.8) (0.3)
Information Technology 3.1 10.5 4.0 6.2 1.2 16.7 Industrials (1.9) (1.2) 2.3 0.6 (1.0) 2.7 (0.2)
Industrials 2.0 11.2 3.9 4.9 1.7 16.6 Telecommunication Services (0.6) (1.0) 1.5 0.4 (1.1) 0.5 (0.1)
Health Care 1.9 12.2 3.8 5.5 1.3 15.8 Materials 0.5 0.7 0.9 0.1 (0.5) 1.1 0.6
Telecommunication Services 2.4 6.6 3.2 7.7 3.0 14.0 Consumer Staples 0.4 0.3 2.2 (0.7) 1.4 1.9 0.9
Financials NM NM 1.3 NM 1.5 13.2 Energy 2.4 1.9 (1.4) 1.1 3.1 0.3 1.5
Source: FactSet, I/B/E/S, FirstCall, and Goldman Sachs Global Investment Research.
flows 20
3
0 15
(3) 10
(6) Mutual 5
funds
(9)
Mar-14
Mar-15
Mar-16
Dec-13
Jun-14
Dec-14
Jun-15
Jun-16
Sep-14
Sep-15
Dec-15
Sep-16
0
(2) (1) 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
YTD total return (%)
Mar-15
Mar-16
Jun-14
Sep-14
Dec-14
Jun-15
Sep-15
Dec-15
Jun-16
Sep-16
Gov't Treasury 32 (0.1) (0.5) 70 (0.2) 5.3
Money Market 2,356 4.8 (59.7) NA NA NA
Source: FactSet, Lipper, and Goldman Sachs Global Investment Research.
145
Momentum Factor Sector and Stock Correlation
0.9
GSMEFMOM
140 Average sector correlation
135 Goldman Sachs 0.8
Momentum Micro Equity Factor
130 0.7
(high vs. low)
Average Correlation
125
0.6
120
115 0.5
110 0.49
0.4
105
0.3
100
95 0.2
0.23
90 Average stock correlation
0.1
Apr-14
Feb-15
Jun-14
Aug-14
Oct-14
Dec-14
Apr-15
Feb-16
Jun-15
Aug-15
Oct-15
Dec-15
Apr-16
Jun-16
Aug-16
Mar-14
Mar-15
Mar-16
Dec-13
Jun-14
Sep-14
Dec-14
Jun-15
Sep-15
Dec-15
Jun-16
Goldman Sachs Breadth Index (GSBI) Return Dispersion
100 +/- 1 Standard Deviation
30-yr avg = 35
90 1-Month Returns 3-Month Returns
GS Breadth Index = 28
Goldman Sachs Breadth Index
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
Financials 9 14 26 15 23 18
2 2 R = SPX return Information Technology 17 20 41 24 36 12
w = individual constituent weights
2 2 r = individual constituent returns Consumer Staples 11 12 46 15 21 10
Economics
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Sep-15
Dec-15
Mar-16
Jun-16
Sep-16
Dec-13
Jun-14
Sep-14
Dec-14
Jun-15
Sep-15
Dec-15
Jun-16
Sep-16
Mar-14
Mar-15
Mar-16
2015 2016 2017
3.5 7.0
50 101.8
3.0 6.0
China CAI 25 101.4
China CAI
US CAI
2.5 5.0
0 101.0
2.0 4.0
(25) 100.6
1.5 3.0
1.0
US CAI 2.0 (50) 100.2
Jun-14
Sep-14
Dec-14
Jun-15
Sep-15
Dec-15
Jun-16
Sep-16
Mar-14
Mar-15
Mar-16
Dec-13
Jun-14
Sep-14
Dec-14
Jun-15
Sep-15
Dec-15
Jun-16
Sep-16
Dec-13
Jun-14
Sep-14
Dec-14
Jun-15
Sep-15
Dec-15
Jun-16
Sep-16
Mar-14
Mar-15
Mar-16
Mar-14
Mar-15
Mar-16
Our Current Activity Indicator (CAI) measures the growth signal in major high-frequency activity indicators for the US economy, expressed in GDP-equivalent units.
Dec-14
Dec-15
Dec-16
Dec-17
Dec-18
Dec-13
Dec-14
Dec-15
Dec-16
Dec-17
Dec-18
Dec-13
Dec-14
Dec-15
Dec-16
Dec-17
Dec-18
Investment Grade (IG) spread High-Yield (HY) spread Global Equity Market performance
Price Return (%) US Dollar Local
210 bp 1000 bp
Market 1-Wk 1-Mo 3-Mo 2016 YTD Currency
190 bp 900 bp Brazil (Bovespa) 9% 5% 14 % 38 % 18 %
Korea (KOSPI) 5 4 9 5 3
170 bp
800 bp Australia (ASX 200) 5 2 3 4 1
150 bp U.S. (S&P 500) 0 3 6 4 4
700 bp
130 bp Mexico (Bolsa) 2 0 (0) 1 6
121 bp 600 bp 586 bp France (CAC 40) 0 1 2 (1) (5)
110 bp
98 bp 510 bp UK (FTSE 100) 1 2 3 (2) (0)
500 bp
90 bp Germany (Dax) 0 0 7 (2) (6)
Investment Grade High-yield
Japan (TOPIX) 2 4 6 (2) (14)
70 bp (IG) spread 400 bp (HY) spread
Europe (DJ Stoxx 600) 1 2 4 (3) (7)
USD USD
50 bp 300 bp Spain (IBEX 35) (1) 1 3 (4) (8)
Dec-13
Dec-14
Dec-15
Dec-16
Dec-17
Dec-18
Dec-13
Dec-14
Dec-15
Dec-16
Dec-17
Dec-18
Average 2% 3% 5% 3% (1)%
Source: FactSet and Goldman Sachs Global Investment Research.
Disclosure Appendix
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