Goldman Raises Its S&P 500 Target Even as Profits Slow
The bank cut 2019 earnings estimates for the S&P 500 Index, citing an economic slowdown, lower oil prices and weak margins.
(Bloomberg) -- While corporate America’s profit engine is about to cool, Goldman Sachs Group Inc. says a Federal Reserve interest-rate cut will continue to boost stock prices this year.
The bank cut 2019 earnings estimates for the S&P 500 Index to $167 a share from $173, citing an economic slowdown, lower oil prices and weak margins, according to a note Tuesday from strategists led by David Kostin. At the same time, the group raised its year-end price target by 100 points to 3,100, implying a 3% gain for the equity benchmark in the final five months of the year.
The S&P 500 surpassed Goldman’s prior year-end target earlier in July as investors grew confident the Fed will dial back interest rates in an effort to extend the longest economic recovery on record. Tuesday’s move aligns Kostin with a growing Wall Street crowd predicting a slowdown in corporate profit that won’t dent the stock market. Since the start of May, 13 of 22 strategists tracked by Bloomberg have slashed profit estimates, while none have cut year-end price targets.
Like others, Kostin’s team cited the Fed as one reason for their more optimistic view on the market. While corporate profit growth has slowed to a trickle in the first half of 2019, investors remain more willing to pay up for equities as the Fed prepares to cut rates for the first time in a decade. The S&P 500 has rallied 20% this year, and by Goldman’s count, more than 90% of the gains come from an expansion in price-earnings ratios.
“The dovish Fed pivot has driven the equity market rally in 2019, and we expect low interest rates will continue to support above-average valuations going forward,” Kostin wrote.
Equity valuations will keep growing to support the market next year, the team said. They lowered their 2020 profit forecast to $177 a share from $181 while initiating a price target of 3,400. That represents roughly a 13% increase from the S&P 500’s last close.
--With assistance from Ksenia Galouchko.
To contact the reporter on this story: Lu Wang in New York at lwang8@bloomberg.net
To contact the editors responsible for this story: Brad Olesen at bolesen3@bloomberg.net, Jeremy Herron, Dave Liedtka
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