Goldman Sachs strategist offers surprising view on stocks

Stocks rose on Friday as stronger-than-expected jobs data boosted investor enthusiasm for the economy.

A strong economy means strong earnings, which means higher stock prices. Nonfarm payrolls rose 254,000 in September from 159,000 in August. And the unemployment rate fell to 4.1 percent from 4.2 percent.

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The strong numbers point to a soft landing for the economy, many experts say. This is a continued reduction in inflation without a downturn in the economy.

Investors are divided on where the stock market is headed here.

That sentiment drives stocks higher. “Markets can be confident of maintaining their recent euphoria and continuing to expand,” Lara Castleton, US head of portfolio construction and strategy at Janus Henderson, wrote in a commentary.

The euphoria stems from the S&P 500’s climb to 43 record closing highs this year. And “spread” refers to spreading the rally beyond the big tech companies.

“We should be wary, however, of placing too much emphasis on a single printed work, especially given the recent downward trend in revisions,” Castleton said.

The jobs numbers will likely make the Fed less accommodative

The employment data should prevent the Federal Reserve from cutting interest rates by 50 basis points in November, as it did in September, experts say. Interest rate futures indicate a 97 percent chance the Fed will cut rates by 25 basis points at its next meeting — and a 3 percent chance it won’t move.

“The Fed will breathe a sigh of relief to see some job growth in September after a weak summer,” said Bill Adams, chief economist at Comerica Bank in Dallas.

Bulls and bears can both make hay on the prospect that the Fed will cut rates only by small amounts. Bulls may argue that smaller rate cuts are a sign of the economy’s strength.

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And bears may argue that rate cuts generally boost stocks, so the smaller the rate cuts, the smaller the benefits for stocks.

Meanwhile, earnings and valuations paint a mixed picture for the market.

Analysts expect earnings per share for the S&P 500 to rise 4.2% in the third quarter from a year earlier, according to FactSet. That would represent a slowdown from 11.3% in the second quarter, but it’s still a solid number.

However, the ratings seem stretched. As of Oct. 4, the S&P 500 traded at 21.4 times analysts’ earnings estimates for the next 12 months, FactSet says. This is well above the five-year average of 19.5 and the 10-year average of 18.0.

Nationwide is full of action

One expert who is optimistic is Mark Hackett, head of investment research at Nationwide, the financial services company. He also cites the expansion of rising stocks.

Over the past two months, the percentage of S&P 500 companies that have outperformed the index is the highest it has been in 30 years, he said.

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Additionally, “investor sentiment is strong but not overly so,” Hackett wrote in a commentary. The Bank of America Bull & Bear Indicator stands at 6.0 (on a scale of 0 to 10), up from 5.4 last week.

“This is the biggest increase of the year, based on strong flows and supporting credit market techniques,” he said.

Goldman’s Rubner is also enthusiastic

Scott Rubner, managing director of global markets at Goldman Sachs, is also bullish on stocks. For the next three weeks, he expects strong volatility as supply of stocks outstrips demand.

But “I am bullish on the stock for a year-end rally starting Oct. 28 and am concerned that my target of 6,000 is too low,” he wrote in a comment cited by Bloomberg on Wednesday.

The fund manager buys and sells:

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That level would represent a 4.3% increase from Friday’s close of 5,751.

A major reason for Rubner’s enthusiasm: Since 1928, the S&P has risen an average of 4 percent from Oct. 27 through the end of the year, Rubner said. In addition, investors are moving from cash to stocks after the uncertainty of the presidential election fades, he said.

Certainly, Rubner’s year-end S&P 500 target tops Goldman’s chief equity strategist David Kostin’s 5,600.

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