It is perhaps the definition of irony that just two hours after the Fed issued a surprising statement that was so bullish on US growth it is as if the past month never happened, as if Williams and Bullard never threatened with QE4 just because the market almost entered a correction, and that made Goldman's chief economist Jan Hatzius to a express "modest hawkish surprise" that the very same bank, Goldman, whose alum is in charge of the NY Fed (leading to hours of secret tapes exposing the white glove treatment Goldman gets at the Fed), just announced it was cutting its 2015 and 2016 EPS forecasts "diminished global GDP growth and lower crude prices."
Here is how Goldman's David Kostin puts it:
We trim our S&P 500 earnings forecasts to incorporate diminished global GDP growth and lower crude prices. Our revised EPS estimates equal $122 in 2015 and $131 in 2016, reflecting growth of 5% and 8%. Every 100 bp shift in US GDP growth translates into $6 per share, while a similar shift in world ex-US GDP growth is $3 per share. A $10 drop in next year’s Brent oil price from our $84 assumption would lift 2015 EPS by just $1 but raise 2016 EPS by $4. We forecast 2015 sales growth of 4% and net margins of 9.1%, both below consensus. A 50 bp shift in margins equals $5 in EPS.
We forecast S&P 500 EPS will rise from $116 in 2014 to $122 in 2015 and to $131 in 2016, implying annual growth of 5% in 2015 and 8% in 2016. Our estimates are below current bottom-up consensus EPS estimates of $129 in 2015 and $144 in 2016. Looking ahead, we expect S&P 500 EPS will rise by 8% to $141 in 2017 and by 6% to $150 in 2018. We revise down our near-term earnings forecasts to incorporate diminished global GDP growth and lower crude prices. We now expect S&P 500 EPS of $122 for 2015 and $131 for 2016, down from $125 and $132, respectively.
The largest gaps between our top-down sector earnings forecasts and bottom-up consensus occur in Energy, Health Care, and Information Technology. Exhibit 16 compares our sector earnings forecasts with the bottom-up consensus estimates.
We forecast S&P 500 sales excluding Financials and Utilities will grow by 4% in 2015 and 6% in 2016. Our sales estimates are roughly in line with consensus, 4% in both 2015 and 2016, but differ by sector composition (see Exhibit 17). Looking further ahead, we expect S&P 500 sales growth of 7% in 2017 and 6% in 2018.
We forecast trailing four quarter net margins will remain at the current historical high of 9.1% through 2015 before rising slightly to a new peak of 9.2% in 2016. The forces that influence margins are equally balanced between upside and downside. Firms remain focused on efficiency gains and cost controls, and commodity prices will remain controlled. Labor costs are a potential headwind for margins in the medium-term.
Margin expectations are the key difference between our forecast and consensus. Bottom-up consensus forecasts S&P 500 margins will reach a new peak level of 9.2% by the end of 2014. Consensus also expects aggressive margin expansion to 9.8% in 2015 and to 10.5% in 2016.
Our forecasts do not incorporate an explicit buyback assumption because the impact of buybacks on S&P 500 EPS is low. The index EPS calculation aggregates company earnings rather than EPS, so company share counts have less impact on the index.
So if something unexpected happens and declining global growth is also met by a oil supply crunch and Brent soars right back over $100, what does that mean: a US recession and global depression?
As to what the main driver of Goldman's bout of gloom is, the answer is everyone but the US.
We assume Global GDP grows at an average annualized rate of 3.3% in 2015 and 3.8% in 2016. Our assumptions imply the world excluding the United States grows at 3.3% in 2015 and 4.0% in 2016. Both Global GDP growth assumptions are slightly below our economists’ current forecasts of 3.5% and 3.9%, respectively. Exhibit 6 shows the sensitivity of our EPS model to various US GDP growth rate and Global ex-US GDP growth rate assumptions.
So with global growth slowing, which is to be expected with the Chinese housing bubble rapidly deflating and Europe in a triple-dip recession, hooker and blow addbacks to pro-forma GDP aside, Goldman is basically expecting that the US will decouple from the entire world, and grow at the highest rate since before the Lehman collapse?
Exhibits 2 and 3 show the sensitivity of our EPS model to various US GDP growth rate assumptions. A 100 bp shift in 2015 US GDP growth translates into a $6 per share shift in 2015 EPS. The sensitivity of our 2016 EPS estimate to 2016 US GDP growth rates is similar. Our US GDP sensitivities incorporate both the change in US GDP and the consequential adjustment in Global GDP growth.
Even with a US economy expected to grow at 3% in the next few years, investors are concerned about a slowing world economy and the impact on S&P 500 EPS growth. Foreign sales accounted for 33% of aggregate revenue for the S&P 500 in 2013. However, that means 67% of revenues are earned domestically.
Our EPS model is more sensitive to US GDP growth assumptions than Global ex-US GDP growth. While a 100 bp adjustment in US GDP growth moves S&P 500 EPS by 5%, or $6 per share, the equivalent 100 bp adjustment to Global ex-US GDP growth changes EPS by less than 3%, or $3 a share. Sector sensitivities differ as some areas are more globally exposed than others.
Oh, and we forgot to mention: the US is expected to grow 3.1% as the Fed not only no longer injects the much needed flow to keep the market rising, but is also, supposedly, about to start hiking rates making the US economy encounter something it hasn't seen in over 6 years?