Goldman Lowers Its 2010 And 2011 S&P Forecasts By 50 Points On Footsteps Of Friday's GDP Reduction, Quotes Churchill
On Friday, following Goldman's downward GDP revision, we speculated "Look for ... the 2011 S&P consensus to decline accordingly." Turns out we are right much faster than anticipated, and not surprisingly the first bank to lower its S&P forecast is none other than Goldman. The firm has decided to boost its 2010 EPS estimate from $81 to $83, but lower it 2011 projection from $93 to $89. And the temporary bullish revision higher for 2010 action is to be ignored: as David Kostin says "We have reduced our S&P 500 price target by 50 points to 1200. The new target reflects a 7% expected return over the five months until year’s end. Our 12-month target equals 1250, roughly 11% above the current level...At the end of May – just eight weeks ago – we raised our 2011 EPS estimate to $93 from $90. It was a badly timed decision in retrospect. The economic landscape has changed significantly during the last two months. The macroeconomic data that seemed to indicate improvement in April and May deteriorated sharply in June and early July. Cutting our 2011 EPS estimate to $89 represents a reversal for us and reflects the more challenging economic environment we now face compared with the backdrop just a few months ago. At this time we are reminded of Winston Churchill’s famous response when asked why he changed his mind, “When the facts change, I change my opinion. What do you do, sir?"" As a reminder the firm's old 2010 and 12 month estimates were 1,250 and 1,300 respectively. The attached chart shows the revised Goldman estimates, which are basically a broad reduction in the curve by 50 points lower.
More from Goldman:
- Raising our 2010 earnings estimate to $81 from $78. For the second time in two months we are boosting our 2010 operating EPS estimates for the S&P 500. Profit margins for the S&P 500 (excluding Financials and Utilities) reached 8.0% for the four quarters ended in 2Q 2010, fully 96% of its previous cycle high and 290 bp above the low of 5.9% reached in the recent downturn. The primary drivers of our $3 per share increase in 2010 EPS estimates include Industrials ($1) and Information Technology ($1).
- Cutting our 2011 earnings estimate to $89 from $93. Our US Economics team recently lowered its annual average GDP growth forecast for 2011 to 1.9% from its previous estimate of 2.4%. US GDP growth is a key input into our sales and margin forecasts. Cutting our 2011 EPS estimate to $89 represents a reversal for us because, at the end of May, we raised our 2011 EPS estimate to $93 from $90. It was a badly timed decision in retrospect. The economic landscape has eroded significantly during the last two months. A combination of reduced earnings from Energy (-$3), Health Care (-$1) and Financials (-$1) partially offset by increased profits from Information Technology (+$1) explain the EPS cut.
- Reducing our year-end 2010 target for the S&P 500 to 1200, 7% above current levels. We place a greater emphasis on the results of our Dividend Discount Model (DDM) compared with the other valuation approaches. Our DDM model is highly sensitive to the cost of equity and the long-term rate of inflation. A 10 bp change in either input adjusts the forecast 2010 year-end fair value of the S&P 500 by approximately 50 points, or almost 4%.
We believe the second part of our forecast, namely other banks dropping their own GDP estiamtes, will also commence to be validated shortly.