Goldman's Cohen Tells CNBC Stock Values Are 'Not at All Stretched'
U.S. equity market valuations are "not at all stretched," Goldman Sachs Chief U.S. Portfolio Strategist Abby Joseph Cohen told CNBC Tuesday.
"We think that what happened last week in the markets will prove to be primarily a market event," Cohen said, in an interview on CNBC's "Squawk Box." "There have been some areas that were overpriced; many investors too willing to look at some very risky securities. When we take a look at the S&P and the Dow our feeling is that the fundamentals supporting those stock markets are, in fact, in very good shape."
Cohen cited growth in the U.S. economy, moderate inflation and second-quarter earnings reports for her opinion.
Cohen expects fears about liquidity in the credit markets to persist over the near-term. She said this will be fueled by comments from portfolio managers regarding their performance in the latest period. However, looking beyond this, she expects fundamentals to remain strong.
"We don’t see an economic recession," Cohen said. "We think corporate profits continue to grow at a moderate pace, and importantly valuation, we think, is not at all stretched in the equity market. Indeed, the S&P 500 is currently trading at under 16-times earnings."
"Normally," she continued, "when inflation is under 3%, the average PE-multiple is 18.5-times, so we’re below where we would normally be on a PE-ratio basis."
Looking at other valuation models, such as the dividend-discount model or the discounted cash-flow model, the market also looks like it has room to grow, according to Cohen.
She expects an appropriate year-end value for the S&P 500 Index is about 16,000, or about 10% above its current value.
Cohen continues to believe that investors should shift their investments away from companies that rely on the housing market and consumer spending for their growth. Instead, they should focus on the more cyclical side of the economy and companies that benefit from corporate spending or profits outside the U.S.