Goldman Explains Why It Lowered Its S&P Forecast From 1,500 To 1,450

Tyler Durden's picture

It only took Goldman less than 5 months to roundtrip on its latest S&P 500 forecast (from January 7, "We are raising both our 2011 and 2012 S&P 500 earnings estimates by $2 per share to $96 and $106...we are raising our year-end 2011 price-target to 1500") - much better than the 3 weeks it took the firm to flip flop on oil. Just out from Goldman's David Kostin, who has finally started his retreat, which we believe will end at 1,250 before QE3 is formally announced: "We have reduced our S&P 500 2012 EPS estimate to $104 from $106 and lowered our 2011 year-end price target to 1450 from 1500. We now expect S&P margins to peak in 2011 and decline slightly in 2012. Those changes reflect forecast revisions for lower global GDP growth, higher oil prices and more inflation. At the sector level we recommend overweight positions in Energy and Consumer Staples and underweight in Consumer Discretionary and Utilities. We expect stocks with strong revenue growth to outperform those relying on margin expansion to grow earnings and recommend buying our High Revenue Growth basket."

More bullets:

Our conversations with clients this week focused on changes to our S&P 500 forecasts and recommended sector allocations. In particular the discussion centered on (1) our forecast that S&P 500 margins will peak in 2011 and decline modestly in 2012 and (2) whether Consumer Staples can continue to outperform the market if oil prices rise.

We lowered our 2012 S&P 500 earnings forecast to $104 from $106 per share. That adjustment reflects a combination of recent forecast revisions for lower global GDP growth, higher crude oil prices and slightly more inflation. We now expect world GDP will expand by 4.3% in 2011 and 4.7% in 2012, down from 4.9% and 4.7% respectively. Our Global ECS Commodity Strategy colleagues have raised their Brent oil price forecast to $120/barrel (from $105) by year-end 2011 and $140 (from $120) by end of 2012. Our US Economists’ forecast for core inflation is now 1.3% in 2011 and 1.4% in 2012 up from 0.7% and 0.5% at the start of the year. Our European Strategists have also lowered their 2011 forecasted earnings growth for the Stoxx 600 to 14% from 20%, with a new 12-month index level target of 315 (from 330).

Our year-end 2011 target for S&P 500 is now 1450, down from 1500. The new target reflects a potential return of 9% through year-end. We had raised our target to 1500 in January from 1450. Our dividend discount model (DDM)-based mid-2012 target of 1500 reflects a 13% gain from current levels and an implied forward P/E of 13.9x.

We believe profit margins for the S&P 500 will peak in 2011 at 8.9% and begin to decline in 2012. Our view contrasts with analyst consensus who forecasts margins will rise to 9.1% in 2011 and climb to 9.6% in 2012. Margins typically peak roughly one year following an ISM peak and equity returns have historically been positive during margin contraction cycles.

Arguments are strong on both sides of the margin debate. The higher margin view is based on economic slack in the form of high unemployment and low capacity utilization alongside aggressive corporate expense control. A favorable sector mix with heavier index weights in Info Tech and Health Care is also supportive of index margins. Input cost inflation, already high margin levels, and moderate increases in corporate SG&A create margin risk.

Buy High Revenue Growth basket (Bloomberg ticker: <GSTHREVG>1). Our sector-neutral high expected revenue growth basket is composed of 50 US stocks with superior sales growth forecasts. Firms with strong revenue growth should outperform companies that rely on margins to drive earnings growth. The basket has 2012 median expected sales growth of 15% compared with 6% for the S&P 500. See page 17 for basket constituents.

We have shifted our sector recommendations with respect to late cycle performance trends but give nearly equal consideration to macro factors such as higher commodity prices, expiration of Fed asset purchases, higher interest rates and sovereign credit risk. We are recommending the following changes to US equity portfolios:

  • Raise Consumer Staples to 200 bp Overweight from Underweight 200 bp on slowing input cost inflation and fewer downward consensus revisions;
  • Raise Health Care to Neutral from 100 bp Underweight on positive earnings revision and restructuring trends;
  • Lower Info Tech to Neutral from 200 bp Overweight as we expect margin decline in 2012 and below-market growth for large cap names (ex-AAPL);
  • Lower Consumer Discretionary to 200 bp Underweight from Neutral on margin contraction and exposure to higher oil prices;

Remain Overweight Energy; Underweight Utilities; and Neutral Materials, Industrials, Telecom Services, and Financials.

Some clients question whether recommending overweight positions in Energy and Consumer Staples is incongruous. We believe higher oil prices will be perceived as negative for economic growth and consumer spending. Staples outperformed the market by 900 bp since mid-February as oil rose above $110 and we estimate US GDP growth expectations fell by 50 bp. During six previous oil bull markets Staples beat the market three times, most notably by 17% from Jan-07 to July-08, and also outperformed Consumer Discretionary in four episodes.

GIR Launches iPad App Providing Access to Research

Global Investment Research is now providing a new way for corporate and institutional clients to access research reports, covering more than 3,000 equity and credit securities across 25 markets in 50 economies. The new app is free to download from the iTunes store, and reports are available to anyone with access to research on GS360 including corporate and institutional clients after a one-time activation process. Search for “Goldman Sachs Research” in the iTunes store on your iPad. Learn more about the Goldman Sachs Research app on GS360.

Hmmm... let's see who suggested this QE2 unwind trade first: "it probably makes sense to avoid any long Financial leg and focus
purely on Utilities and Consumer Staples as the long led in a
compression trade, while shorting Industrials and Consumer
, leaving Financials alone (John Paulson's projections of
Bank of America hitting $30/share by the end of 2011 notwithstanding)." Good to know someone is reading...

Weekly Kickstart 5.28

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equity_momo's picture

 "and recommend buying our High Revenue Growth basket."


Well we know what Goldman Inc are long of then...... i wouldnt touch what this chump is pushing with a 50 foot shitty stick.

euclidean's picture

Surely someone within the ZH zone of influence is running a GS ann chart versus top/bottom ticks? Can we see it please? Sadly haven't been running a GS correlation myself.

Have noticed every now and then GS throws in a live one amongst the corpses.

1/GS is more profitable in the long run.

Id fight Gandhi's picture

But. I don't want qe3. That will just raise the prices on everything we need to buy soar.

cat2's picture

There is no choice.  I don't get how people think it will go to 1250 before qe3.  I think there is only enough raidable funds in public pensions to last to end of summer, after that they have to either 1) find more raidable funds (401k?), 2) start up qe3 or 3) shutdown the government.

Guess which one is likely?

Nobody special's picture

Overweight energy and essentials, underweight anything discretionary.  In short, no end to the 'recovery' boys.  Buckle up.

Mae Kadoodie's picture

OT: Tyler, no coverage on Super Typhoon Songda? TEPCO needs to get that tent up in a hurry.  This could be a game changer:

Smiddywesson's picture

We forcast more real chop than rally in the dollar while our central bank masters juggle stocks and commodities in a pathetic stalling action while they ready a gold standard.  This will, of course, be some perverted enbodiment of a gold standard, guaranteed to do the most hurt to the most people, but just not the banks, and guaranteed to be heralded as the only thing which can address ballooning national debts, that were created by those very same central banks in the first place.  Get ready for $44k per ounce gold when it's in the central banker's best interest, not a moment sooner.  Fundamentals don't matter to banks.  It's all about holding onto power by keeping everything tied neatly together.  The funny thing is everybody is worried about how wars always pop up during times like these.  Not that I'm pro war, but as I see it, the only thing which can throw a monkey wrench into their plans is war.  Wars cut the ties that bankers have woven around our societies.  Central bankers are spiders, they have us bound up, and they are slurping up our life's blood.    

cosmictrainwreck's picture

oh, is that what that huge SUCKING sound is that I've been hearing?

disabledvet's picture

i'm still trying to figure out how Conoco/Phillips can have an over/under of 50 billion on the revenue side in one year.  "I think we're going to take over the world...unless we get completely obliterated next week."  At least the estimates are "vectoring to victory." 

ElvisDog's picture

So, how does margin expansion work in a world where input costs are going up and wages are stagnant?

equity_momo's picture

Like this:


You want to eat? You want to keep warm? You want to be able to travel to Moms for her Birthday?

Thats gonna cost you more of your income , companies providing those essentials will increase margins in markets that stagnate (that'll be the entire World basically) It doesnt matter what your wage does , youre just going to have to give up the non-essentials. Seriously.

Get used to some self imposed discipline. All those vices and luxuries we think we need - cut em back. 5 dollar coffees , 50 dollar bottles of whiskey , cigarettes , cigars , i-pads , apps , video games , movies , vacations , nice food , nice cars. Matching sofas. Plush rugs. Designer sunglasses. Start kissing it goodbye. 

Discretionary spending for anyone outside the top 0.1% is going to start dropping drastically. The rich may have got a whole lot richer in the last 3 years but theyre not spending enough to prop up this consumer driven economy. Walmart outperforms. Apple doesnt.

JW n FL's picture

Tangibles to out perform when the top 5% realize the top 1% of 1% is still squeezing even them!


Absolute Funds to be crushed! or milked.. again!


Hard Assets will be going up, the worse it gets the more the flight to safety will take hold. As much as the FED has discouraged the sheepeople from Silver and Gold in the past with its tricks.. those same tricks and dare I say any new ones will be seen for what they are.. people will panic, with just cause!


"We the People" or "We the Sheep who Consume" for our Corporate Masters already are Fucked! it will be about anyone under that $100m mark going forward. Those people already think that they have paid their fair share but Greed will win out and thusly they will start to suffer along with the rest of us.


Corporations Own the Lobby!


The Lobby Owns the Government!


Law Enforcement works for the Duly Elected Lobby Whores!


We the People = Screwed!

disabledvet's picture

great question.  "how did they do it in the 90's?"  is one answer "for those who don't take their money on faith alone."  another is as referenced here often "by taking from that other guy over there" often known as "the zero sum game."  people laughed at me when i was talking "geography" at another site--some of these were some PhD professors believe it or not--and yet who can argue with what happened with finance when Napoleon was "looking at his maps"?  in a nutshell "i design, build, ship and sell that better mousetrap" and "when i do it i call it Mousetrap (tm)" as well.  i still don't know "what's been invented here" at ZH...or at Seeking Alpha for that matter--it is something however and as such "has immediate value to an investor" based on the simple fact that "we don't know what it is."  Cramer said correctly at the lows in 2008 "you can't pick a bottom" but he also said correctly "most of the gains in a bull market are made in the first year of a recovery."  If it sounds more like "philosophy" then congratulations "you are on the path of understanding" which none of us truly attain.  In short "if you're trying to make sense of it you've already missed out."  Never forget even in th 90's "traders were becoming philosphy majors to do what they truly loved because...

JW n FL's picture

If Goldman is selling shorts.. then QE3 must already be on the books!

max2205's picture

Look at TLT run while equities flatten. QE3 could be the greatest SELL THE NEWS this decade. We'll see

cat2's picture

Don't fight the FED.  They are all-powerful.

bugs_'s picture

underweight utilities....fallout from fukushima

in fact it looks to me like the entire adjustment is an attempt to quantify the impact of the japanese supply issues.

consider the impact on industries that are large consumers of this electricity that will need to be replaced with a "more costly" form.

JW n FL's picture

there can be no growth..


if there is growth..


Oil will be bid up..


wage arbitraige is dead!


The entire, Global Economic Model is a Farce... Oil is Not $100bbl..


the Price of Oil is subsidized back down to prices that look normal to the sheep.


most of the oil guys trade paper for PM's.. thusly if you ca control the price of PM's you can to some extent argue that oil should be low as well or in line with the cost of PM's.


there can be no growth, Globaly becuase there is not enough energy to sustain that growth.. so you have this faux growth, paper growth.


the new normal is becuase of oil or that lack there of.. and let me be clear for the new crowd.. when I say peak Oil.. I dont mean that there is Not a LOT of Oil around.. there is a LOT of Oil around the World.. but sweet lite crude that is 100 feet under the desert and 3 miles from a deep water port.. or Affordable Oil is what we dont have enough of, that is where we have peaked. We do have Lots of Oil.. 5 miles under the earths crust which is under 10,000 feet of water in the Gulf of Mexico.. sour crude..


Sour Crude Producton capabilites in the U.S. are up to 10%? now? LOL!


4m a day to depletion! or 5%.. a year.. watch the above video! enjoy all!


by the way! Sorry Bugs I got off on a rant and stop talking to you a long while back. I know you know this stuff!

bugs_'s picture

rant away LOL this is the place

RobotTrader's picture

Week after week the tape has been shaking off the worst economic news since 2008.  Wonder what happens when the news actually starts getting better?  We could blow past 1,500 easy.

cosmictrainwreck's picture

agree that market is "topping" - "shoulda" turned any given day the past 6 months BUT the power of POMO and bullshit ES bidding is uncanny. Sadly, the Robohead has been right all along (so far). Hence, I am both long & short; squeeze a few $ out of what's left of the run, positioned for pull-back (which will also be rigged to work out to precisely 5% or 10% or 20% or whatever the FUCKHEADS decide. What a deal......

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