Goldman Sachs cuts S&P 500 target to 4,700, sees lower earnings growth
Higher commodities prices and lower expectations for U.S. GDP have Goldman Sachs' equity team cutting its broader market forecast.
Strategist David Kostin and team now expect the S&P 500 (SP500) (NYSEARCA:SPY) to end the year at 4,700, down from a previous forecast of 4,900 and about 12% from current levels.
They now see S&P EPS rising 5% in 2022, down from an earlier forecast for 8% earnings growth. The 2023 EPS forecast remains at 6%.
"Our 4700 target embeds an expectation that the forward P/E multiple will rebound from 19x today to 20x by year-end as the Equity Risk Premium (ERP) compresses," Kostin said in a note. "Our year-end 2022 implied absolute valuation represents a 5% P/E decline from the 21x multiple at the start of 2022."
"In our base case, real yields climb from recent lows but remain negative through 2022 despite Fed tightening. At the same time, decelerating growth and inflation and reduced political uncertainty should compress the ERP from today’s elevated level," he added. "The current 620 bp gap between the S&P 500 earnings yield and the real 10-year US Treasury yield (NYSEARCA:TBT) (NASDAQ:TLT) is the widest since March 2020 and matches levels in 4Q 2018, underscoring the potential value opportunity in US stocks if the growth outlook improves."
High commodity prices are a greater threat to the S&P 500 than the situation in Ukraine, Kostin said.
"Our commodity strategists recently raised their forecasts for crude oil prices. They outlined three potential scenarios, ranging from a resumption in exports in the coming months to a sustained reduction of Russian seaborne exports. These scenarios point to oil prices ranging from $115/bbl to $175/bbl in 2022. On a probability-weighted basis, their Brent crude spot price forecasts equal $135/bbl in 2022 and $115/bbl in 2023."
SA contributor Brian Gilmartin looked at S&P earnings and the worst multiple compression since the 1990s.