In the past week, the one recurring theme among the permabullish parade on financial propaganda TV has been to ignore the closed stock market and banks in suddenly imploding Greece, the situation in Puerto Rico, the recent plunge in US stocks which are now unchanged for the year, and what may be the beginning of the end of the Chinese bubble and instead focus on the "strong" US fundamentals, especially among tech stocks - the only shiny spot an an otherwise dreary landscape (and definitely ignore the energy companies; nobody wants to talk about those). So we decided to take a look at just what this "strength" looks like.
Well, we already saw the collapse in hedge fund hotel Micron Technology, which plunged 30% after it slashed its guidance last week. Alas that may be just the beginning. Here are the year-over-year revenue "growth" estimates for some of the biggest tech companies in Q2:
- Hewlett Packard: -7.3%
- IBM: -14.2%
- Microsoft: -5.5%
- Intel -4.5%
- Texas Instruments -1.1%
- Western Digital -7.2%
- Ericsson -19.6%
- Qualcomm -13.9%
- NetApp -11.3%
And that is the best sector among the "strong fundamentals" story.
In fact, the only bright light in the entire tech space may well be AAPL whose sales are expected to grow 29%. We wish Tim Cook lot of strength if the recent Chinese market crash has dampened discretionary spending and demand for AAPL gizmoes in China. He will need it.
But what's worse is that while reality will clearly be a disaster, there is always hype and always hope that the great rebound is just around the corner, if not in Q2 then Q3, or Q4, etc.
This time even the hype is be over because none other than the most influential bank on Wall Street, the one all other sellside "strategists" religiously imitate, Goldman Sachs, just slashed its EPS and S&P500 year end price forecast for both 2015 and 2016.
Here is Goldman with its explanation why it is lowering S&P 500 EPS:
We reduce our near-term earnings forecasts to incorporate diminished US GDP growth, a stronger dollar, and lower crude prices. Since October 2014 when we published our previous EPS forecast, expected 2015 real GDP growth has declined by 70 basis points (to 2.4% from 3.1%), the trade-weighted US dollar has strengthened by 9%, and crude prices have dropped by nearly 30%. In response to these macro headwinds and two additional quarters of realized earnings data, we lower our 2015 EPS target by $8 to $114 (from $122) and reduce our 2016 EPS by $5 to $126 (from $131). Energy EPS alone will decline by $8 in 2015, from $13 to $5.
We maintain our 2015 S&P 500 target of 2100. Reduced EPS growth will be offset by a stable P/E. We previously forecast higher earnings with a P/E contraction. Our new EPS forecast is $114 (down from $122) reflecting slower GDP growth than we had originally assumed, a stronger US dollar, and a collapse in Energy company profits. S&P 500 will post just 1% EPS growth in 2015.... Initial Fed hike in December will allow P/E to end 2015 at an elevated 16.7x
So earnings are bad and getting worse, but for Goldman that is not a reason to cut its S&P forecast simply because the economy is weaker than expected and also getting worse which means the rate hike originally forecast to take place in June is now set to take place in December, and thus boost P/E multiples (it won't of course but that will be Greece's fault).
We maintain our S&P 500 price target of 2100 for 2015, as the negative impact of our lower EPS is offset by a later-than-previously-expected Fed hike. Our US economics team now believes the first hike will take place in December rather than September. S&P 500 P/E, which is historically rich, will stay elevated through the remainder of 2015, but will compress when the Fed starts its tightening cycle in December. Looking forward, S&P 500 will rise alongside earnings, increasing 5% in 2016 and 2017 to 2200 and 2300, respectively
So... the combination of deteriorating earnings and an even bigger slowdown in the economy ends up being a wash and keeping the S&P year end price target at 2100.
Ah, the magic of financial Goldman's financial gibberish.
So aside from Goldman's 21x forward multiple (because 114 non-GAAP is about 100 GAAP which means Goldman is expecting a 21 Price to GAAP Earnings multiple) simply due to the Fed's hike delay from June to December, is there any good news?
In fact, this is what Goldman's David Kostin has to say: "Macro headwinds diminish 2015 earnings growth prospects. S&P 500 sales will fall by 2% in 2015, the first annual decline in five years. Margins will slip to 8.9%. Energy is a drag on both sales and margins." Let's just focus on the "near-term" slip before we worry about the "long-term rebound."
And before the intrepid questions of "this is only due to energy" arise, here is Goldman explaining that the weakness was broad, and impacted every single sector.
We lowered 2015 EPS levels in all 10 sectors, with Energy and internationally-exposed Information Technology declining most. We trimmed nearly $2 from our 2015 Energy EPS estimate after further cutting both expected sales growth and margins (see Exhibit 1). Information Technology EPS was cut by $2, due to the sector’s leverage to diminished economic growth and foreign exchange risk (60% of sector revenues generated abroad versus 33% for S&P 500).
But wait, there's more: because in addition to its EPS forecast, Goldman also slashed its GDP and the 10Y yield forecast as well.
We expect US GDP will grow at an average annualized rate of 2.4% in 2015 and 2.8% in 2016. In contrast, last October our assumed growth rates for the US economy equaled 3.1% and 3.0% for 2015 and 2016, respectively (see Exhibit 2). While our previous assumptions incorporated a sizeable 18% decline in crude oil prices, the actual decline has been twice as large, averaging 36% on a year-over-year basis.
So ok, Goldman had a 25% error in its forecast in just under 9 months. Does that mean that the vampire squid is even remotely remorseful or concerned about the credibility of its 2017 and 2018 (yes, 2018) forecasts? Not at all: those are expected to remain completely unchanged on the back of some of the highest EPS gains in recent history. In fact, putting in context, Goldman now expects just 1% EPS growth in 2015 which will then magically soar to 11% in 2016 before "stabilizing" to a "modest" 7% annual EPS growth rate.
We expect S&P 500 operating EPS of $134 (+7%) in 2017 and $143 (+7%) in 2018. We expect S&P 500 ex-Financials and Utilities revenue will increase by 6% in 2017 and by 5% in 2018. Coupled with stable margins of 9.3%, ex-Financials and Utilities EPS should rise by 6% and 5%, respectively. We assume Financials and Utilities EPS growth of 10% during 2016 and 13% in 2017.
With just a little hyperbole, we can say that the only way S&P EPS will grow at that pace is if the S&P ends up buying back half its float.
But while one can double seasonally adjust non-GAAP BS until a massive loss becomes a huge profit, one item can not be fabricated: sales. It is here that Goldman has far less to say for obvious reasons.
Our new forecast assumes Energy sales will shrink 32%, pulling aggregate S&P 500 sales growth into negative territory for the first time in five years. We expect S&P 500 sales per share to decline by 2% in 2015, in line with consensus.
Yes you read that right "sales per share", because if buybacks can boost Non-GAAP earnings, why not revenues too.
If there is a silver lining on the horizon it is one: "We forecast Health Care will grow sales faster than consensus expects."
The corporations thank you Obamacare.
* * *
So to summarize: the first revenue drop for the S&P in 5 years, a major downward revision in EPS now expecting just 1% increase in 2015 EPS, a 25% cut to GDP forecasts, a machete taken to corporate profits and 10 Yields, and not to mention double digit sales declines for some of the most prominent tech companies in the world.
And that, in a nutshell, is the "strong fundamentals" that everyone's been talking about.