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