Goldman Sachs chief U.S. equity strategist David Kostin is bearish on stocks, and he thinks weak data at both the macro level and the micro (company) level out this week support this position.Furthermore, he doesn’t consider the prospect of lower oil prices to be a saviour for equities, as some suggest.
In Kostin’s latest note to clients, he writes:
We roll forward our 3-month, 6-month, and 12-month S&P 500 price targets at the start of every quarter. Our forecasts are 1300 (-4%) in 3 months, 1250 (-8%) by year-end 2012, and 1350 (-1%) in 12 months.
This week brought renewed evidence that the US equity market has modest downside risk during the next six months. At the macro level, Goldman Sachs Economics’ tracking estimate of 2Q 2012 GDP equals just 1.6%. The Durable Goods report was consistent with lackluster growth in capex. PCE growth was flat in May and prior months’ data was revised lower.
At the micro level, evidence continues to accumulate that weakness in Europe, Asia, and US will weigh on 2Q and full-year 2012 EPS. Last week we highlighted firms from a range of industries that lowered sales and EPS guidance. This week Ford (F) and Nike (NKE) highlighted various challenges.
Kostin says that clients are asking him what sort of impact the drop in oil prices in the second quarter will have on company earnings. He doesn’t think it will be much of a boon for stocks:
Lower oil prices have only a minor effect on our EPS forecasts on a stand-alone basis. GDP growth expectations have a greater impact on our index-level EPS estimates, so only a persistent oil price decline would affect our forecast. We expect minimal change to our 2012 EPS estimate of $100. But a 20% decline in 2012 oil vs. our forecast could increase 2013 EPS by $3.
Additionally, Kostin notes that Goldman’s commodity strategists, who thanks to a large client base wield considerable influence in oil markets, are calling for oil to go higher anyways, so it’s unlikely that stocks will benefit regardless.
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