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Goldman Cuts S&P 500 Price Target, Charts The Market's 10% Correction

Submitted by Tyler Durden on 08/06/2011 13:32 -0400

Like clockwork, the Wall Street reactionaries confirm that when it comes to predicting the future, and/or actually having a proactive stance, one better look elsewhere. In responde to last week's 10% correction, first Goldman's economics team downgrades the economy and floats its demands for the SS QE3, next its FX teams downgrades the USD, and finally Joseph Cohen replacement David Kostin cuts his price target on the S&P. To wit: "We reduce our year-end 2011 price target to 1400 from 1450 and our 2012 EPS estimate to $102 from $104, due to lower global GDP growth estimates. Our 2011 EPS estimate remains unchanged at $96. S&P 500 trades 12% below its April peak and has experienced its 15th correction of at least 10% since 1975 reducing the forward P/E to 12.0X our top-down EPS estimates and 11.3X consensus bottom-up estimates. Current valuation is consistent with support levels in October 2008, July 2010 and our uncertainty-based P/E fair value, suggesting further risk is more likely reliant on negative earnings revisions than further multiple contraction." We can only hope that at least someone knows what Wall Street's sell side is paid millions of dollars for. Alas, it is not us.

And some more wise rearview mirror words of wisdom from the Goldman head strategist:

We reduce our 2012 S&P 500 earnings forecast to $102 per share (from $104) and lower our year-end 2011 price target to 1400 (from 1450) due to downward revisions of GDP growth estimates in the US, Europe, and Asia, along with our commodity strategists’ 2012 Brent crude oil forecast of $140/barrel. Our 2012 global GDP growth estimate is now 4.4%, down from 4.6%. We maintain our 2011 EPS forecast of $96 based on strong earnings momentum in 1H 2011 despite weaker than expected economic growth. We expect 15% S&P earnings growth in 2011 and 6% in 2012 driving 17% upside for the index through year-end 2011 and 21% return for the next 12 months.

We expect profit margins to peak in 2011 at a level slightly below our previous estimates. Our estimates for S&P 500 margins remain 8.9% in 2011 and are now 8.7% in 2012, down from 8.8%. That view differs starkly from bottom-up consensus expectations for 9.1% margins in 2011 rising to 9.6% in 2012. We now forecast margins will decline in five sectors including Materials, Information Technology and Consumer Discretionary.

We lower our S&P 500 sales per share estimate by 1% to $922 ex-Financials and Utilities. Our revenue growth forecasts are now 10% in 2011 and 7% in 2012 and are generally in-line with consensus expectations for 12% growth in 2011 and 6% sales expansion in 2012. The most notable change in our sector sales estimates a -4% revision in Materials sector.

Commodity prices remain a headwind. Goldman Sachs Commodities Research’s forecast for Brent crude to rise 21% to $140/barrel by year-end 2012 is premised on the view that global GDP growth above 3.5% will create a supply-demand imbalance and push oil prices higher until demand rationalizes. High oil prices boost our aggregate sales estimates, benefiting the Energy sector at the expense of lower sales and margins for other US firms.

The current S&P 500 correction is the 15th such pullback since 1975. The index stands 12% below the April 2011 high of 1364, so the drop is 620 bp smaller than the median correction of the past 35 years. At 97 days, the current episode is in-line with the average duration of past corrections.

Multiple contractions during prior market corrections suggests the current forward P/E multiple of 11.3X could be near a valuation-multiple bottom: (1) during the financial crisis, S&P forward P/E bottomed at 10.8X in October 2008; (2) in April 2010 the P/E reached 11.5X as the market digested Europe sovereign credit concerns and slowing US growth; and (3) our uncertainty-based P/E estimate suggests a fair P/E between 9X and 11X. If we are nearing valuation support levels, continued downside risk wouldshift to earnings estimate revisions as well as attendant macro risk premium.

Charting the 10% correction:

Full presentation:

Weekly Kickstart 8.6

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Sat, 08/06/2011 - 13:35 | 1530965 caerus

notice the gigantic impending right shoulder slide on the h&s on the s&p...oh, wait...tech a doesn't work...sorry

Sat, 08/06/2011 - 14:33 | 1531258 midtowng

That's what I spotted to. A 12+ year H&S top. That is epic.

Sat, 08/06/2011 - 14:50 | 1531332 caerus

good times...to be on the right side of that trade...

Sat, 08/06/2011 - 17:31 | 1531682 Highrev

Dream on suckers.

BTW, very nice report packed with very useful info. (Got to give a thumbsup when and where it's due.)

Sat, 08/06/2011 - 13:37 | 1530975 Dr. Engali

This markets seen it's top for the year. Long term chart is a triple top. The baby boomers aren't going to go through it again. This is the end.

Sat, 08/06/2011 - 13:40 | 1530986 caerus

upon further inspection...yes it does appear to be a trip top...take it down to 400-600 in time

Sat, 08/06/2011 - 14:35 | 1531269 midtowng

That 10% penalty for early withdraw from a 401k is going to look downright cheap compared to a 20%+ correction in the market.

Sat, 08/06/2011 - 14:49 | 1531329 caerus

lol...agreed...i told my friend that the other day...he's got a gov job...

Sat, 08/06/2011 - 13:38 | 1530980 EhKnowKneeMass

Goldman's Sachs, beaches.

Sat, 08/06/2011 - 13:41 | 1530996 silvertrain

The Vix should be hopping come Monday..

What about California? Ill ? The whole US gets downgraded but states skate?

Sat, 08/06/2011 - 13:53 | 1531048 caerus

they'll go too...a lot of that muni debt is graded on the assumption that fed debt is "risk free"

edit: iow that the feds will backstop

Sat, 08/06/2011 - 13:53 | 1531062 DrDre

Revised "down" to 1400? The S&P will be lucky to end abobe 1300, if any ...

Sat, 08/06/2011 - 14:22 | 1531226 Doyle Hargraves

S&P 666 Bitchez!

Sun, 08/07/2011 - 13:52 | 1533168 rocker

I like the way your thinking. A complete revisit. I called for 1167 and we got to 1168. I think 900 could be next leg lower. The question is do we bounce off this last drop because, (as they say), we are oversold. And then saying the downgrade was priced in. Or do we just fade and quickly drop. Next week will be interesting for sure.

Sun, 08/07/2011 - 14:19 | 1533282 Doyle Hargraves

I am thinking technicalities like being oversold are out the window when there is this much manipulation going on, I say it will go down quickly, just based on the news and current events, 666 is symbolic to them of course, but if it goes down then ben can print, becuase he has been in the corner with his hand up for over a month going "call on me I have the answer, I have the answer!", and so it is his turn to answer the question, how do we get out of this mess right now?

Sat, 08/06/2011 - 14:25 | 1531235 LetThemEatCake

If GS really thinks 1400 is a realistic target it means a lot of people are long equities still and equities could fall a lot further.

Sat, 08/06/2011 - 14:40 | 1531286 midtowng

Why are they only going back to 1975? Why not include the 66-74 bear market?

Sat, 08/06/2011 - 15:01 | 1531368 slewie the pi-rat

Do The Math

w/ slewie

lower our year-end 2011 price target to 1400 (from 1450) due to downward revisions of GDP growth estimates in the US, Europe, and Asia, along with our commodity

yest, S&P = ~1200, so 200 away from 1400.

200/1200 = 16.7% increase by new years day!

if they had left the estimate at 1450, then we would be 250 away

250/1200 = 20.8% by year-end

so you can see how they benefit from this reasonable movement in the goalposts. most of their customers will just think they're a bit teched in the head and not totally insane

but really, it is hard to tell what this wild bull will try next, isn't it?

Sat, 08/06/2011 - 15:09 | 1531389 jkruffin

WOW, a whole 50 point EOY downgrade, what on earth will we do? LOL These clowns are all posturing for their own positions...half of them short, the other half long.....why even announce a 50 point estimate cut on S&P, that is like me saying I cut AAAPL end of year PPS from $400 to $398 oh man we better panic....LOL

Sat, 08/06/2011 - 15:36 | 1531434 I am a Man I am...