Lowered Guidance for 36 Months
After a relatively upbeat third-quarter earnings season, Goldman Sachs Group Inc (NYSE:GS) wants to remind the market that one data point does not constitute a trend.
Despite the fact that 80% of companies beat expectations, analyst David Kostin warns that Goldman is “trimming [its] S&P500 forecasts” for the next three years. It matters little that tech stocks rebounded with gusto this quarter, or that macroeconomic data were encouraging. (Source: “Goldman Cuts S&P500 Earnings Forecasts For The Next Three Years,” ZeroHedge, October 24, 2016.)
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“We lower our 2016 and 2017 S&P 500 operating EPS estimates by $5 and $7, respectively,” writes Kostin. “Our reduced 2016 forecast of $105 (from $110) reflects annual growth of 5%. For 2017, we expect operating EPS will rise by 10% to $116 (down from $123).”
His research note was a rainy day in an otherwise sunny quarter, but Kostin undoubtedly has his reasons. Chief among them is the Federal Reserve’s penchant for low interest rates, and how it could place a low ceiling on growth for information technology, financials, and telecom stocks.
In particular, financials and information technology stocks could be significantly harmed by the continued downward pressure of low interest rates. They are the largest S&P 500 sectors based on earnings per share (EPS), yet their EPS growth flatlined this year.
Financials survived based on the marginal difference between interest rates, but their spreads were compressed in today’s low interest rate environment. It has severely damaged their bottom line.
“We now expect Financials EPS will rise by just 1% in 2016, down from our previous forecast of 9% growth,” Kostin writes. “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.”
Low interest rates are also wreaking havoc on information and technology stocks, but in a different and less obvious way than they are for financials.
“Information Technology and Financials are also the major contributors to the reduction in our 2017 S&P 500 EPS forecast,” Kostin continues. “We expect Telecom operating EPS will decline in 2016 as low interest rates increase pension liabilities.”
