The permabullish Goldman Sachs has been forced to face reality for stocks:
Lower earnings, lower price: Our revised year-end 2022 S&P 500 target of 4700 represents 10% upside from today. Our previous target was 4900. A surge in commodity prices and a weaker outlook for US and global economic growth lead us to lower our EPS estimates. Our new 2022 EPS estimate of $221 reflects 5% year/year growth compared with our prior estimate of 8% growth to $226. Our forecast 2023 earnings growth rate remains unchanged at 6% but the EPS level is trimmed to $233 (from $240). A 12% upward revision to Energy sector EPS partially offsets headwinds to profits in other sectors from decelerating consumer spending and increased input cost pressures. Excluding Energy, we expect S&P 500 EPS will grow by just 2% in 2022 vs. 6% for consensus.
Valuation recovery, eventually: 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. 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 2022despite Fed tightening. At the same time, decelerating growth and inflation and reduced political uncertainty should compress the ERP from today’s elevated level. The current 620 bp gap between the S&P 500 earnings yield and the real 10-year USTreasury yield 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. Because we expect the various sources of current investor uncertainty will take time to be resolved, most of the equity upside should come later in 2022.Our 3- and 6-month S&P 500 targets are 4300 and 4400, respectively.
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