Goldman Sachs Lowers S&P 500 Earnings Forecast, Predicts Key 2016 Issues

Goldman Sachs Lowers S&P 500 Earnings Forecast, Predicts Key 2016 Issues

Strategist David Kostin and Goldman’s US equity team released a statement on Thursday, January 7th announcing a $3 decrease in their S&P 500 earnings per share (EPS) forecast. New figures sit at $106, $117, and $126 for 2015, 2016, and 2017 respectively.

Energy Sector Woes

Goldman labeled the energy sector as the primary driver of reduced profit expectations and predicted the category to post its first decline in operating EPS in 48 years. Both domestic and international energy companies have suffered from the global drop in oil prices, which recently fell to 12-year lows. The ongoing surplus of oil, combined with diminished demand, suggests little reprieve any time soon for the energy industry. As prices dip below the break-even point for many U.S. producers, earnings have fallen as a result of declining operations, ceased drilling project, and rig closures.  Though energy EPS has toppled with the fall of crude oil prices, Goldman warns of only a “modest recovery” for the remainder of 2016. Since relevant data collection began in 1967, this marks the first annual operating loss in the sector.

Topics to Dominate 2016

Goldman expects energy earnings, economic conditions, and margins to be the three topics that dominate the earnings discussion in 2016.

• As the energy outlook has pushed Goldman’s projections downward, the equity team believes that S&P 500 margins have plateaued. As such, they are advising investors to target stocks with growing margins.

• Since 2009, the IT sector has contributed over half of the total S&P 500 margin growth, with Apple leading the way at 22% of overall margin expansion. That being said, economic panic in China during the first week of January has sent Apple stock, along with other tech giants, tumbling. Goldman envisions technology margins peaking and then declining during the next two years. In total, 34 firms are expected to raise margins at least 50 basis points annually in 2016 and 2017.

• Looking at the bigger picture, the team expects “muted economic growth” in 2016 and forecasts:

    o U.S. GDP growth averaging 2.2%

    o China GDP growth of 6.4%

    o World ex U.S. GDP growth of 3.7%.

Goldman’s S&P 500 top-down forecasts, which gauge the broader market for sales, margin, and EPS projections, sit beneath bottom-up estimates, which look at individual companies. S&P 500 for 2016 estimates for the year are 4% growth in sales per share, 8.8% profit margin expansion, and 11% EPS growth, while bottom-up forecasts are 6%, 9.6%, and 18%.

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