Never before has the job of Goldman's equity markets strategist been so difficult: on one hand he has to deal with an economy that is openly imploding after a readjustment of Q2 GDP to below subspeed, a drop in Q3 growth from his economic team as of last night to 2.5%, and a growth hockeystick that nobody (except for Joe LaVorgna of course) believes in any more. On the other he has to get paid for spreading propaganda to the firm's whale accounts even as GS is openly selling into any risk rally (Abacus deja vu). And while the latest weekly chartology from David Kostin is already very much outdated, after Jan Hatzius was forced to admit in his latest Friday night bomb installment that our view on the economy (i.e., absent stimulus = game over) is correct, he does make pretty charts. So ignore all the forecasts as they are 100% wrong as usual and focus on the pretty breakdowns of what has already happened. If nothing else, Goldman proves that billions in taxpayer bailout funds and secret Short Term OMO access can sure buy a damn good WP/Graphics department.
The key points from this week's kickstart:
Macro events have overshadowed the start to 2Q 2011 earnings season.
Investor dialogue focused on European sovereign credit risk and the ongoing political and financial debates over various proposals to solve the crisis. Identical issues apply to the US. The August 2nd deadline to raise the federal debt ceiling is fast approaching and domestic political discord rivals that of continental Europe. Credit rating agencies responded by announcing the increased likelihood of a near-term downgrade of the US sovereign credit rating. The impact of policy tightening in key emerging economies was another macro risk frequently raised by fund managers. Our year-end 2011 S&P 500 target remains 1450 (+10%) based on strong corporate profit fundamentals and undemanding valuation. 61% of firms will report earnings this month which should affirm our view and support higher equity prices.
Accelerating macro risks in both US and Europe pushed the S&P 500 down 3% this week.
In the US an impasse in debt ceiling negotiations led to warnings from Moody’s that “there is a small but rising risk of a short- lived default” and risk to the Aaa credit rating, while Standard & Poor’s placed US federal government debt on credit watch for possible downgrade and assigned a one in two probability that it would lower the rating to AA from AAA in the next 90 days. Our Washington analyst believes politicians are coalescing around a $1.7 trillion deficit reduction package. In Europe, concern about the Greek support package has spilled over to Italy where credit spreads rose to post-EU highs.
Next week 109 companies (36% of S&P 500 market cap) will report 2Q earnings.
More than half of Information Technology market cap reports next week, including AAPL, IBM and MSFT, and 45% of Industrials is scheduled to release earnings, including GE, UPS, CAT and MMM. Please see pages 5-7 for next week’s earnings calendar including KO, BAC, JNJ, T, MDC and F.
Micro fundamentals remain strong.
Despite weak 1Q GDP growth, ROE expanded for the sixth straight quarter and rose for 58% of S&P 500 firms representing 64% of index market cap. This week we published the third in a series of reports on the Anatomy of ROE at the S&P 500 index (Part I), sector (Part II) and stock (Part III) levels. Part III updated the progress of index and sector ROE, examined the P/B expansion pattern during ROE cycles, and back-tested the investment performance of ROE strategies at the stock level.