Goldman Head Of Equity Strategy David Kostin Sets Stage For FYE 2011 S&P Downgrade

Tyler Durden's picture

Yesterday we wrote: "In good old
"he who defects first" fashion, we predict that it will be Goldman once again to
be the first desk to downgrade both Q2, H2, and FYE GDP, to be promptly
followed by David Kostin cutting his S&P 2011 forecast from 1,500
to 1,300
. After all the time to set the stage for QE3 is fast
approaching and who better to load up on commodities in advance than the
world' second largest hedge fund (the largest of course being the
Federal Reserve)." We were right. Here, in a note released literally seconds ago, is David Kostin setting the stage for the S&P downgrade. Why? Because the S&P needs to be at or below 1,100 for QE3 to become politically viable. Quote Kostin: "The risk-reward balance is more mixed for US equities than in December (1) our US Economics team sees downside risks to their 2011 US forecasts; (2) the risk of higher interest rates has grown as inflation expectations have risen; and (3) the potential for near-term oil price volatility is up. These risks have implications for earnings, index returns and sector allocation."

US Sector Views: Shift sector weights closer to benchmark on balanced risk-reward

The risk-reward of our equity outlook is less uniformly positive than in December 2010 and we accordingly move our recommended sector weights closer to benchmark. Uncertainty from slower economic growth, rising inflation, and high oil prices have created crosscurrents to our base-case cyclical outlook. We lower Financials to Neutral from Overweight and reduce our Underweight recommendation in Health Care. We remain Overweight Energy and Info Tech and Underweight Consumer Staples and Utilities.

Risk-reward balance has become less uniformly positive

The risk-reward balance is more mixed for US equities than in December (1) our US Economics team sees downside risks to their 2011 US forecasts; (2) the risk of higher interest rates has grown as inflation expectations have risen; and (3) the potential for near-term oil price volatility is up. These risks have implications for earnings, index returns and sector allocation.

Lower Financials to Neutral from 200 bp Overweight

The passage of key catalysts, notably the Fed’s approval of dividend and share buyback plans for some banks, has shifted the risk-reward to neutral for S&P Financials. Potential tailwinds from loan demand growth, credit reserve releases and attractive valuation are now balanced by regulatory overhang, smaller balance sheets and a challenging rate environment.

Reduce size of Health Care Underweight to 100 bp from 300 bp

We have recommended an Underweight position in Health Care since May 2009. However, negative EPS revisions have stabilized and positive reaction to acquisition and restructuring may also signal a turning point for the sector. Government austerity and patent expiry remain headwinds.

And yes, next up is a downgrade to Kostin's S&P target, but first Jan Hatzius will trim his H2 GDP forecast from 4.00% to 3.00% (and ultimately 1.25%).

 

Kostin 4.14