Goldman Sachs Group Inc. thinks the S&P 500 will end the year a mere 3 percent higher than where it is today, and it is even more pessimistic for the near term as first-quarter earnings season kick off in the U.S.
"Near-term risk is skewed to the downside," the team, led by Chief U.S. Equity Strategist David Kostin, said in their weekly kickstart note. There are three reasons Goldman is using a glass half empty approach.
1. Energy and banks
Oil is still trading around $40 a barrel, and this leads Goldman to believe firms in the energy sector will have to write down assets, which in turn leads to lower earnings expectations. This problem is also part of the reason the team is worried about banks. "Our analysts have highlighted a laundry list of headwinds including energy counter-party risk, a slowdown in capital markets activity, and a bruising quarter for asset managers," Kostin & Co. said. "We believe financials earnings per share [EPS}could fall by as much as 25 percent."
2. Negative guidance
The earnings guidance provided by corporate executives has tended to be negative since 2008, meaning management has guided earnings to come in below consensus expectations. That could bode ill for equities as it might see already-depressed EPS expectations revised even lower by analysts. "Since 2006, roughly 20 percent of firms have provided 'next-quarter' guidance during earnings season and 73 percent of firms typically guided below consensus," Goldman found. "Following the depths of the global financial crisis, guidance has grown increasingly negative, and has been worse-than-average since 2012." For instance, in the fourth quarter of last year, Goldman found that 114 firms issued guidance with 83 percent steering towards a future earnings figure below the consensus.
Kostin has issued caution on this topic before, but reiterates his wariness in this note, writing that the bank now expects a 33 percent decline in equity inflows during the blackout periods in which companies typically avoid buying back their shares. That could lead to "a meaningful reduction in what is currently the only source of net demand for U.S. shares," Goldman said. An earlier Bloomberg report found that companies in developed markets bought back the most shares—in terms of monetary value—in the 12 months to March 31, 2016, since the buyback binge that ended in May 2008.