(New York)

Not a day after warning about the unstable financial practices of S&P 500 companies, Goldman Sachs has just gone on the record saying that the S&P 500 is set for another round of big gains. The bank raised its year-end forecast for the index to 3,100. Goldman thinks that stocks are currently trading at fair valuations, and that “The dovish Fed pivot has driven the equity market rally in 2019, and we expect low interest rates will continue to support above-average valuations going forward”. The bank contends stocks will rise a further 10% in 2020.

FINSUM: We think stocks are going to move in line with the economy. If growth stays okay, and the Fed stays dovish, we are in for a move higher. We think the best odds are for a bull case.

(New York)

Gold has had an extraordinary run over the last few months. It is the first time it has really broken out of its funk since just after the Crisis. However, both JP Morgan and Barclays are saying it is probably time to cash out. Both argue that gold’s recent rise has been driven by speculation and not real fundamentals, such as the direction of the Dollar and interest rates. As such, these prices look vulnerable.

FINSUM: This is good analysis, but we also have another reason for you—if the Fed cuts and investors switch to risk-on assets, where does that leave gold?

(Washington)

The first round of the second Democratic debate occurred last night, and it was full of fireworks. Candidates ramped up their attacks on one another, with most of the aggressiveness directed at Bernie Sanders and Elizabeth Warren for their Medicare for All bills that would create an entirely government-run healthcare system. Other candidates criticized the plan as “fairy tale economics”.

FINSUM: We again think that the debate last night showed why Republicans are most likely to win this election—many in the party recognize the need to play more toward the middle to win the race.

(Beijing)

It has been a very bumpy run for US-China trade talks this year, but after a significant hiatus, China will again return to the negotiating table with the US in September. The most recent round of talks, in Shanghai, just concluded without an agreement, but there were some signs of life, as China buying US farm goods was discussed. The negotiators only stayed in Shanghai about 24 hours.

FINSUM: This seems to us like quite an intractable issue. We do not expect a forthcoming agreement any time soon.

(New York)

Beyond high valuations and a potentially worrying economy (not to mention a trade war), there is something else investors need to worry about. Goldman Sachs is warning investors that S&P 500 companies are engaging in unsustainable financial payouts. The bank shows that in the year ending in March, companies in the index spent about 104% of their free cash flow on buybacks and dividends. It is the first time since before the Crisis that companies spent more on payouts than they generated in free cash flow.

FINSUM: So far this behavior is not hurting companies because investors are okay with extra leverage given the likelihood of Fed easing, but this is definitely a warning sign of financial excess.