One of Goldies chief equity strategists says one model points to trouble in the S&P
If you're big on Return of Equity when you're picking stocks then you want to be listening to Goldman Sach's David Kostin, who put out a note today. The ROE is a reflection of profit per every dollar of equity held by shareholders.
Historically investors penalise falling profitability with lower valuations
Despite the 200bp drop in the S&P REO to 14.1%, in the last eight quarters, the Price to Book ratio has expanded to 2.8x, and above the 40 year average of 2.5x
Based on history, an ROE of 14.1% implies a PB of 2.1x and suggests an 25% drop in the index
There's many that have been saying a big correction is coming but we've yet to see one. The last biggest correction was back at the start of the year (started after the hike) and came in at just under 13%. That's been the biggest since the crisis crash.
Kostin also doesn't know when this may happen. He currently has a year end target of 2100 for the S&P.
