Goldman Sachs Slashes S&P 500 Price Target, Sees Negative Return for U.S. Stocks
Goldman Sachs now expects the S&P 500-stock index to finish in the red in 2015.
Chief U.S. equity strategist David Kostin lowered his year-end price target for the S&P 500 to 2,000, from 2,100, citing slower than anticipated growth from the world's two biggest economies and lower-than-expected oil prices.
This drop of nearly 3 percent would be the benchmark index's first negative year since 2011, though this level also represents upside of more than 6 percent from where the S&P 500 closed on Monday.
Kostin's team lowered its estimate for calendar-year earnings to $109, from $114, which would mark a decline of 3 percent from 2014.
Contracting earnings aren't the only cause of Goldman's new-found pessimism.
"A lower path of profits is an obvious reason to lower a price target but the risks for the index level and price-to-earnings multiple have also increased," wrote Kostin.
Goldman's proprietary metrics suggest that the Chinese economy is growing by roughly a full percentage point slower than official data indicate, and the team downgraded its forecasts for U.S. and global growth in 2016. Kostin also noted that the political backdrop in Washington is as unstable as ever, with the resignation of Speaker of the House John Boehner potentially setting the stage for another protracted showdown over raising the debt ceiling.
While some strategists contend that the initiation of a tightening cycle will be a positive for the U.S. dollar and also for market multiples, Goldman's team has taken a different view.
"S&P 500 price-to-earnings multiple fell by an average of 8 percent during the three months following Fed 'liftoff' hikes in 1994, 1999, and 2004," wrote Kostin. "During the same episodes S&P 500 index fell by an average of 4 percent as growing earnings offset the multiple compression."
Kostin sees liftoff by the Federal Reserve in December as an event that will dampen any so-called Santa Claus rally. Rising bond yields, the strategist reasons, entail that investors will be willing to pay less for each dollar of earnings generated by S&P 500 companies.
"We expect the Treasury curve to bear flatten as short-rates rise at a faster pace than ten-year note yields during the next few years," he wrote. "Rising bond yields are consistent with lower multiples."
Goldman's team argues that the price-to-earnings ratio for the S&P 500 has already peaked, which would leave earnings growth as the sole contributor to positive returns for the rest of this cycle.
Nor do Kostin and his crew expect U.S. equities or the economy to kick into higher gear at any time soon. The strategists forecast that the years of double-digit returns for the S&P 500 have passed, forecasting gains of 5 percent or less through 2018:
"Our baseline forecast is that the US economy will grow at a modest pace, earnings will rise, and the S&P 500 index will climb slowly while the P/E multiple declines as interest rates rise," wrote the strategists. "'Flat is the new up' will be the 2016 investor refrain."
In light of its outlook for American equities, Goldman recommends writing out-of-the-money calls (which allow investors to receive a premium but caps their upside) and buying stocks that have a high degree of exposure to the U.S. economy, return cash to shareholders, and have strong balance sheets.
The upside risks highlighted by the strategists include a heavier pace of corporate share buybacks and a tactical, short-term bounce driven by undue pessimism.