A Goldman Sachs (NYSE: GS) report released today (Wednesday) forecast a "steady upward trajectory" for the stock market over the next few years, telling investors now is the time to buy stocks – and reject bonds.
Goldman Sachs Price History
"The prospects for future returns in equities relative to bonds are as good as they have been in a generation," Chief Global Equity Strategist Peter Oppenheimer wrote in the Goldman Sachs report, "The Long Good Buy; the Case for Equities." "Given current valuations, we think it's time to say a "long goodbye' to bonds, and embrace the "long good buy' for equities as we expect them to embark on an upward trend over the next few years."
The report's main focus is that when you compare the price and future returns of stocks to bonds, stocks are a much better deal. Inflation concerns are threatening the bull market in bonds, and a Treasury sell-off has pushed up yields.
The 10-year Treasury yield has risen more than 30 basis points (0.3 percentage point) in a week to close to 2.4%. The 10-year Treasury yield hit a record low of 1.67% in September last year.
"We would expect the early rises in bond yields to be positive for equity prices as they both become a reflection of rising growth and inflationary expectations, and could expect some equity re-rating in the initial stages of rising yields," Oppenheimer wrote in the report.
With Goldman Sachs' endorsement to buy stocks, investors following their call could push the market higher than the 12% gains netted already this year.
Goldman Sachs (NYSE: GS) Report: Time to Buy Stocks
Goldman Sachs reports that stocks have declined in valuation over the past decade due to the tech bubble bursting, the credit crisis, and a huge inflow to U.S. Treasurys.
The result: sinking investor confidence in the U.S. stock market.
"The onset of the credit crunch, and the deleveraging of balance sheets in many developed economies that followed this have punctured the confidence that once surrounded equities, and the pre-1960s skepticism about equity returns has returned," wrote Oppenheimer. "Dividend yields are once again above bond yields and both historical, and expected future returns have collapsed."
Yields are higher as global economic turmoil weighed on some regions' markets in 2011. Europe's debt crisis led the MSCI World Index to fall 7.6% last year. The index is now trading at 13.2 times earnings, according to data compiled by Bloomberg News.
"Periods of sustained falls in the market are typically better times to buy for the long run," wrote Oppenheimer. "Partly, of course, this is also a function of valuations typically improving after a period of sustained losses in the market. Nonetheless, the key point is that in particularly bad economic periods, once the news is fully priced, investment outcomes tend to improve."
The Goldman Sachs report states strong corporate balance sheets and growth in emerging markets justify a higher valuation for stocks. Not only are equities more undervalued than bonds right now, but they will offer huge gains for investors as companies profit from economic growth.
"Our global projections show that the next decade is likely to be a peak period for global growth," states the Goldman report. "If future economic growth is, indeed, stronger, then again the lower expectations currently priced into equity markets is likely to prove too pessimistic."
Goldman Sachs (NYSE: GS) was down 0.4% to $125.51 by 1:30 p.m. ET.
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