In the previous article, I revised my estimate regarding the timing the Fed will choose to start tapering its bond-buying program to December. In these conditions, even if Fed reduces its asset purchases program by $10-$15 billion in December, it will not stop it before at least Q2 2014. In the central scenario, this date should correspond to higher growth in US, a recovery in Eurozone and therefore less risk aversion for companies which could hire more people. Moreover, in the case of deteriorating economic conditions, the Fed could even increase pace of QE purchases following any tapering.
As a consequence, in the central scenario, the Fed total assets will rise at least until Q2 2014 and could support the US equity stock market by pushing investors’ risk aversion lower. As an example, the graph below shows that Fed total assets is clearly linked to S&P 500:
At the same time, the debt ceiling should be adressed and public finances should improve significantly leading price/earnings mulitple higher. This argument has been chosen by Goldman Sachs on May 20 to justify their upward revisions regarding S&P 500 levels in 2013, 2014 and 2015:
We expect S&P 500 index will rise by 5% from the current level to 1,750 by year-end 2013, advance by 9% to 1,900 in 2014, and climb by 10% to 2100 in 2015.
Indeed, Market Watch underlined that:
A team led by David Kostin, chief U.S. equity strategist at Goldman Sachs, say a big reason for the target lifts is down to expectations the U.S. economy will achieve above-trend real GDP growth in 2014, ending a six-year period of economic “stagnation.” And in developed economies, the final year of economic stagnation before GDP growth has been linked to price/earnings multiple expansions averaging 15%, note the strategists. They expect the S&P 500 p/e multiple will continue to rise, reaching 15 times at year-end 2013 and 16 times by the end of 2014.
Finally, note that this scenario seems to be the central case in Wall Street as JPMorgan strategist Thomas Lee has finally decided to join the herd on May 17, predicting the Standard & Poor’s 500 index will gain another 3% this year to end 2013 at 1,715.