goldman sachs david kostinGoldman Sachs
After stock prices slumped in late August, the analysts at Goldman Sachs were quick to argue that we could see a rapid snap back in prices as we did in 1998.
But in a new note to clients, they've changed their tone.
"We have lowered both our S&P 500 earnings estimates and price targets," Goldman's David Kostin writes. "The impetus for these reductions is that our models now incorporate a slower pace of economic activity in the US and China and a lower oil price than we had been previously assuming."
Kostin now sees the S&P 500 ending the year at 2,000, down from his previous target of 2,100. He revised his earnings-per-share estimate to $109 from $114.
The S&P closed Monday at 1,881, down 8% for the year.
Kostin joins his peers at RBC Capital, Bank of America Merrill Lynch, Credit Suisse, and Deutsche Bank, who have all cut their targets for the S&P in recent weeks.
In addition to the economic concerns, Kostin points to elevated valuations (i.e., the price-earnings multiple) during a time when the Federal Reserve is about to tighten monetary policy. Goldman Sachs' house view is that the Fed will raise policy rates on December 16.
rate hikes stocksHSBCPast rate hikes have been associated with shrinking P/E multiples.
"Historically, rising short-term interest rates have been associated with declining P/E multiples," he wrote.
This is not new. Strategists including RBA's Rich Bernsteinand HSBC's Ben Laidler have argued that the Fed could be a problem. This is a serious problem as earnings-growth expectations have flattened out.
Kostin, however, sees earnings growing. In 2016, he sees S&P earnings per share climbing to $120, bringing the index to 2,100 by year-end.
"Finally," Kostin continued, "the political landscape in Washington, D.C., remains unstable" after the resignation of House Speaker John Boehner.
"The federal debt ceiling will be reached in November," Kostin added. "Precedent suggests raising the debt limit will be contentious and may rattle investors."
So there's no shortage of reasons to be worried.
In this environment, Kostin recommends stocks with high US sales, generous dividends, robust share buyback plans, and strong balance sheets.

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