Goldman Sachs has lowered its S&P 500 (INDEX: .SPX) earnings forecast and highlighted key issues for 2016 that investors should watch out for in the year ahead.
Goldman's U.S. equity team, led by chief U.S. equity strategist David Kostin, said in a note late on Thursday that it was lowering its S&P 500 earnings per share (EPS) forecast by $3 to $106, $117, and $126 for 2015, 2016, and 2017.
The revision reflected annual EPS growth of -7 percent in 2015, +11 percent in 2016 and +8 percent in 2018, the note stated, with the strategists expecting that 2015 was "the worst year for S&P 500 earnings since 2008."
Goldman said the energy sector was "the leading driver of its reduced profit outlook" and expected the sector to post a decline in operating EPS for the first time in 48 years. Energy companies in the U.S., and elsewhere, have taken a beating on the global decline in oil prices which have hit 12-year lows of around $32 this week.
A continuing glut in oil supply and the failure of demand to keep up signals no immediate respite for energy companies – particularly those in the U.S. that are part of the U.S. shale oil revolution. With oil prices falling below the break-even cost for many producers, U.S. shale oil operations have dwindled with producers cutting production, cancelling drilling projects and closing rigs. Earnings have suffered as a result.
"Energy EPS has collapsed along with crude oil prices" Goldman said in the note, warning of only a "modest recovery" in the "rollercoaster path of energy earnings" in 2016.
"The sector will post an annual operating loss for the first time since our data series began in 1967. Energy EPS are highly sensitive to oil prices but the impact on S&P 500 EPS is more limited. We assume Brent averages $44/barrel in 2016."
Goldman said it expected three topics to dominate the earnings discussion in 2016: Margins having peaked, the path of energy EPS and the risk of further economic slowdown.
With energy driving Goldman's outlook lower, the equity team noted that S&P 500 margins had peaked and "plateaued" and that investors should buy stocks with expanding margins.
It noted that the IT sector had contributed to more than half of the total S&P 500 margin expansion since 2009, with Apple the leading contributor to that.
"Apple contributed 22 percent of overall S&P 500 margin expansion since 2009. We expect S&P 500 margins will stay high during next two years but technology margins will peak this year and then decline. We identify 34 firms forecast to raise margins by at least 50 basis points (bp) annually in 2016 and 2017," although they did not identify the companies.
On the wider economic outlook, the team forecast "muted economic growth." "Goldman Sachs Economics forecasts U.S. gross domestic product (GDP) growth will average 2.2 percent in 2016. A 100 bp shift in GDP growth translates to $6 per share in EPS." The team forecast China GDP growth of 6.4 percent in 2016 and World ex-U.S. GDP growth of 3.7 percent in 2016.
Goldman's S&P 500 top-down forecasts (which look at the overall market) for sales, margin, and EPS forecasts are below bottom-up consensus (which looks at the individual companies), it said.
For 2016, Goldman assumes 4 percent growth in sales per share, 8.8 percent profit margin expansion and 11 percent EPS growth on the S&P 500, versus bottom-up forecasts of 6 percent, 9.6 percent and 18 percent.
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