Weak stock market returns are ahead even with booming earnings


A continued surge in corporate earnings will have only limited benefit for stock prices, which face multiple policy obstacles, according to Goldman Sachs.

In fact, the bank’s strategists have raised their S&P 500 profits expectations through 2020, but do not expect the improved climate to have a meaningful impact on equity returns.

“The US economy is growing, corporate profits are rising, and stock prices should
continue to climb through 2019,” David J. Kostin, Goldman’s chief U.S. equity strategist, said in a note to clients. “However, the appreciation potential will be constrained by tightening monetary policy, a flattening yield curve, rising trade tensions, and the upcoming mid-term Congressional elections.”

Goldman now estimates full-year earnings in 2018 to come in at $159 per share, a boost from the $150 original forecast. That implies a 19 percent increase from 2017, slightly below the 19.8 percent forecast from the FactSet consensus.

The increase is predicated on faster economic growth in both the U.S. and the broader global economy, higher energy prices and more help than anticipated from last year’s corporate tax cut.

In addition to the profit increase for 2018, Goldman raised its 2019 forecast to $170 from $158, implying 7 percent growth, and 2020’s from $163 to $178, indicating a 5 percent earnings gain.

However, Kostin said the rise in profits will not result in a corresponding increase in multiple, or the price investors are willing to pay compared with earnings. Rising multiples have been a key driver in the nine-year bull market.

The price-to-earnings level will remain, according to the forecast, at about 17 times. In numerical terms, that means the S&P 500 ending the year at 2,850, or about 3 percent from Wednesday’s close, and 3,000 in 2019, or 5.3 percent higher than the 2018 target. That 2019 forecast would be about half of what investors have come to expect from the market over time.

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