That's the message Goldman Sachs (NYSE: GS) chief U.S. equity strategist David Kostin had for his clients in a recent note.
He believes investors are not focusing enough on the potential impact of the fiscal cliff, which could set the stage for jittery markets akin to last year when the debt ceiling debates sent stocks tumbling.
When it comes to anticipating the impact the fiscal cliff will have on markets, "portfolio managers have been swayed by hope over experience," Kostin recently said in his note.
Kostin compared the current situation to last year's debt ceiling crisis when Congress waited until the eleventh hour to reach a deal.
"Investors were stunned and the S&P plunged 11% in 10 trading days (and more than 17% from the level one month prior to the deadline)," Kostin said. "Eventually Congress reached a compromise on raising the debt ceiling."
"We believe the uncertainty is greater this year than it was 12 months ago," Kostin said. "Political realities and last year's precedent suggest the potential that Congress fails to reach agreement in addressing the "fiscal cliff' is greater than what most market participants seem to believe based on our client conversations. In our opinion, equity investors seem unduly complacent on this issue."
The market rally enjoyed this month is a markedly different from last year's showing as markets skirted past the one-year anniversary of the debt ceiling face-offs. But Kostin says the S&P 500 is headed for a fall-and a steep one at that.
Kostin warns: "Assigning a P/E multiple to various fiscal cliff and earnings scenarios is difficult because ultimately we expect Congress will the address the situation. But investors must confront the risk they may not act until the final hour."
His year-end target for the S&P is 1,250; quite a bit lower than the current 1,424.