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: