Interview, Fireside Chat
From Assets to Alpha: David Kostin on US Equities
- The speaker presents a "courageous" forecast for stock returns exceeding 20% next year, contrasting this with a consensus range of 8% to 12%, while the Goldman Sachs portfolio strategy team predicts a 10-year annualized return range of 3% to 10% for the S&P 500 with a midpoint of 6.5%.
- Market conditions in calendar 2025 are characterized by volatility with the VIX trading near 19, though current nervousness is expected to create a favorable setup for calendar 2026 following a steady post-April increase.
- Valuation multiples for the largest companies are expected to trade around 30 times earnings, a decrease from 40 times in 2021 and 50 times in 1999, while the S&P 500 currently trades at 23 times forward earnings, creating potential for future multiple contraction.
- IPO activity in the United States this year has seen approximately 55 deals raising over $25 million, a significant decline from the 280 deals in 2021 and nearly 400 deals in 1999, mirroring the recursive valuation dynamics seen in the private AI market.
- Mutual funds are underweight the largest stocks relative to their benchmark, with only 29% expected to beat style benchmarks compared to a typical 37%, whereas hedge funds are up 12% year-to-date against a 17% S&P 500 increase.
- Earnings growth is expected to reach nearly 9% year-over-year during a strong third quarter, with companies demonstrating concrete AI revenue drivers and healthcare identified as the cheapest sector in 30 years.
- Macroeconomic forecasts include some stability and growth in the middle-income sector, benefits from tax reform kicking in next year, and an expected increase in the Fed funds rate from 3% to nearly 5.5%.
- Long-term returns for calendar 2026 are expected to be below the historical average but still positive, potentially aligning with the 2% return experienced in 1994, a year marked by seven Fed rate hikes and 10-year yields rising from 6% to 8%.
- NVIDIA is highlighted as a case where share price and earnings both increased 12-fold over the last three years, while the speaker anticipates interacting with clients as an advisory director in calendar 2026 before transitioning to successor Ben Snyder.
- A potential risk is outlined based on the 1999 experience, suggesting that if AI-driven growth cannot be sustained, the market may face a recursive decline in valuation and enterprise value.