Thursday, May 26, 2011

Goldman Drops 2011 S&P 500 Target by 50 Points to 1450

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Coming into the year the popular year end 2011 Wall Street target for the S&P 500 was in the 1350ish area.  That was essentially accomplished by mid February so the game began to raise year end targets even further.  Since then we've mostly stayed in a range of 1300-1340 for the better part of 3 months.  Of course as the S&P 500 rallied non stop, most strategists did what they usually do and ramped up their targets for the year right along with it.

I don't recall Goldman Sachs year end target for 2011 coming into the year, but I do believe they increased it sometime in the past 4 months (could be in error on that assumption). Whatever the case, this morning they have lowered the 1500 target down 50 points to 1450.  That is about 5% upside over the yearly highs.

2012 S&P 500 earnings forecast was also lowered, and this is probably the more important line item... as are the reasons.  Namely margin compression (a topic we've been discussing since QE2 was hinted at in late August 2010) pressuring earnings.  S&P earnings for 2012 were lowered from $106 to $104.  Essentially this sort of commentary would indicate that 2011 will be the peak of the margin cycle (margins are at record levels), and Goldman expects elevated commodity prices for a long period of time.  Which has an excellent chance of happening if my prediction that The Bernank will panic next winter and institute QE3.

hat tip Zerohedge for report.

We have lowered our S&P 500 2012 EPS forecast to $104 from $106 and our year-end 2011 price target to 1450 from 1500. At the sector level, the largest changes in our earnings estimates are a $2 increase in Energy 2012 EPS, a $1 decrease  in Information Technology, a $2 decrease in Financials earnings and a smaller negative revision to Consumer Discretionary. We made further minor changes to other sectors that are not large enough to highlight.
We expect S&P margins to contract in 2012, focus on sales growth. The combination of higher commodity prices, lower global GDP growth and rising inflation raises our sales forecasts but lowers S&P 500 expected margins in aggregate. We focus on sectors and stocks best positioned to grow earnings through higher sales. We expect Energy, Consumer Staples and Info Tech to post the highest revenue growth in 2012.
Our new 3-, 6-, and 12-month price targets: 1400, 1450 and 1500

We forecast S&P 500 will grow sales by 10% in 2011 and 8% in 2012, similar to consensus. But we expect margins will peak at 8.9% this year and slip to 8.8% in 2012. Consensus forecasts margins rise to 9.6% in 2012.

Our commodities strategists forecast 20%+ gains in oil, copper, zinc

We expect a slow but sustained GDP growth environment that will tighten key supply constrained markets and drive prices higher in 2012. Persistent impact of MENA events will push Brent crude to $140/barrel by end-2012.

Stocks with fast sales growth should perform even if margins fade
Firms forecast to generate high sales growth in 2012 are better positioned to absorb rising commodity prices and still post strong EPS gains than companies with average or lackluster sales prospects.


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