Goldman sees low earnings growth and lackluster market returns through 2018

Published Mon, Oct 24 201610:43 AM EDT

Goldman Sachs on Monday reduced earnings estimates for the S & P 500 through 2018, citing a challenging economic environment. The cautious outlook by Goldman came as the S & P index trades at about 2 percent from its all-time high, and as many Wall Street pundits cheered better-than-expected third-quarter earnings reports this month. "The U.S. economy will remain stuck in a slow secular growth regime " Goldman's chief U.S. equity strategist, David Kostin, wrote in a note to clients. "S & P 500 margins will increase slightly next year, but remain well below the peak." Goldman now sees just 5 percent earnings growth for S & P 500 companies this year, followed by 10 percent growth in 2017 and back down to a 5 percent pace in 2018. Accordingly, the firm sees the S & P 500 falling about 3 percent from now until the end of the year. Its year-end S & P 500 forecasts for 2017 of 2,200 and for 2018 of 2,300 call for gains of about 2 percent and 6 percent, respectively, from current levels. Source: FactSet Kostin writes, "From a valuation perspective our unchanged year-end 2016 target of 2,100 represents a forward P/E multiple of 18x our 2017 top-down operating EPS estimate of $116 and 17x our 2017 top-down adjusted EPS estimate of $123, ranking at the 85th percentile relative to the past 40 years." The biggest groups in the S & P 500 based on earnings contributions to the index, technology and financials , are projected to post dismal results due to low interest rates and peaking margins. "We now expect financials EPS [earnings per share] will rise by just 1 percent in 2016, down from our previous forecast of 9 percent growth. Low long-term interest rates have crimped financials earnings and comprise $2 of the aggregate $5 reduction in our overall S & P 500 EPS forecast," Kostin wrote. "Information technology EPS will fall by 4 percent in 2016 as net margins decline by 170 bp [basis points]." Earnings growth in other areas of the market such as telecom are also expected to be affected, as low interest rates increases pension liabilities for some of these companies. The only silver lining in the group could be the energy sector , which has been the main drag on earnings in the past quarters, but now may become the main contributor of earnings growth as oil prices seem to finally bottom. "A rebound in crude oil prices mean that energy write-downs, which have plagued S & P 500 EPS for more than a year, should fade in the second half of 2016. Earnings for the energy sector will be less negative this year than in 2015 (which was the first time in 48 years the sector posted an operating loss)," Kostin wrote. "In fact, overall S & P 500 operating EPS growth of 5 percent in 2016 is almost entirely attributable to energy. We forecast just 1 percent EPS growth outside of energy this year," he said. Other factors such as a strong dollar and a subpar economy will also weigh on earnings and profitability, Goldman Sachs warns.

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Goldman Sachs on Monday reduced earnings estimates for the through 2018, citing a challenging economic environment.

The cautious outlook by Goldman came as the S&P index trades at about 2 percent from its all-time high, and as many Wall Street pundits cheered better-than-expected third-quarter earnings reports this month.

"The U.S. economy will remain stuck in a slow secular growth regime " Goldman's chief U.S. equity strategist, David Kostin, wrote in a note to clients.

"S&P 500 margins will increase slightly next year, but remain well below the peak."

Goldman now sees just 5 percent earnings growth for S&P 500 companies this year, followed by 10 percent growth in 2017 and back down to a 5 percent pace in 2018. Accordingly, the firm sees the S&P 500 falling about 3 percent from now until the end of the year. Its year-end S&P 500 forecasts for 2017 of 2,200 and for 2018 of 2,300 call for gains of about 2 percent and 6 percent, respectively, from current levels.