Banking, finance, and taxes

2018 Bull/Bear Outlook: Goldman Sachs Can Become Golden Slacks Again

Jon C. Ogg

Published: January 3, 2018 12:05 pm

Last Updated: January 12, 2020 4:53 am

Now that 2017 is gone and 2018 has arrived, investors have to contemplate what to expect ahead. After all, this raging bull market is now nearing nine years old, and it has been the strongest bull market that most investors have ever seen. The Dow Jones Industrial Average rose 25% and the S&P 500 rose by almost 19.5% in 2017. Wall Street is by and large calling for tax reform, earnings growth and higher GDP growth to continue the stock market gains in 2018.

24/7 Wall St. just came out with its annualized forecasting tool showing that DJIA 26,400 and at least 2,855 on the S&P 500 are the baseline targets for 2018. For the Dow to make its targets, Goldman Sachs Group Inc. (NYSE: GS) is going to have to do its part.

Goldman Sachs generated a return of 6.4% in 2017, far better than the 3% drop expected by the consensus group of analysts a year earlier. After closing at $254.76 in 2017, its consensus price target of $258.40 and the 1.18% dividend yield would imply an expected total return of 2.61% in 2018.

As far as what other strategists are calling for in the broader market, Credit Suisse is now targeting 3,000 and Oppenheimer is targeting 2,900 for the S&P 500 in 2018. At the end of 2017, the forward valuation for the S&P 500 Index was 18.5 times earnings to 19.0 times expected earnings per share per two main sources.

Goldman Sachs is a top financial player in the world, but pure-play banks and brokerage firms tend to carry lower price-to-earnings (P/E) ratios than the broader market. Goldman Sachs is valued at less than 13.5 times expected 2017 earnings and is valued at closer to 12 times expected 2018 earnings per share.

One thing Goldman Sachs could do, particularly under the thought of lower corporate taxes, would be to increase its paltry dividend. Thomson Reuters is calling for the annualized dividend to rise to $3.21 per share in 2018, but that is barely 15% of its consensus operating earnings per share. With a nickname like “Golden Slacks” some investors may expect a firm of this caliber to have a better payout.

While Goldman Sachs should be a beneficiary under tax reform, the company did just disclose that it would take a $5 billion charge against earnings. Most of that was tied to repatriation of overseas cash, but it is a big number that has to be factored in.

Merrill Lynch, one of the chief bulge bracket brokerage firm rivals of Goldman Sachs, recently issued a report that Goldman Sachs shares could rise to $300 in a recent upgrade. If things work out in the more bullish scenario than the base-case scenario, Merrill Lynch even believes that Goldman Sachs shares could rise as much as 40% ahead.

Goldman Sachs was also among the banks getting brokerage firm target price hikes after third-quarter earnings. If that continues in 2018, then the consensus target price might have more room to run higher.

Goldman Sachs has a 52-week trading range of $209.62 to $262.14 and a market cap of $96 billion. Its weighting in the Dow is 7.09%, but the rank is roughly 56th by market cap in the S&P 500.

Investors should at least consider that 2018 could be a bumpier ride for the stock market than what was seen in 2017. We have featured our own 10 risks that could wreck the bull market in 2018, and we have also identified low volatility strategies for equity investors who are wanting upside from stocks but perhaps lower downside.