The Goldman Sachs Group, Inc.                                                                                             ...
US equity market outlook Record profits but cautious outlookIndex: We forecast 5% return to our 12-month S&P 500 target of...
Goldman Sachs S&P 500 price targetsS&P 500 EPS to exceed prior peak and reach $96 in 2011               1700              ...
Our US equity market forecasts and key assumptions     1. Global economic growth will equal 3.8% in 2011 and 3.5% in 2012....
Our US equity market forecasts and key assumptions((continued)          )     6. Valuation in the current uncertain econom...
Goldman Sachs 3- and 12-month forecasts                                                                                   ...
Goldman Sachs Economics forecasts GDP growth    of 3.5% for World, 1.6% for US, and 7.2% for BRICs                     ,  ...
Goldman Sachs forecasts US real GDP growth of                                  1.8% in 2011 and 1.6% in 2012              ...
Sputtering labor market means unemployment rate                                          will remain above 9% through y   ...
Consumer confidence back to March 2009 low;   ISM level now 50.8, down from 61.4 peak in February                     ,   ...
US housing prices are 32% below peak S&P/Case-Shiller 20-City Composite Home-Price Index                                  ...
Another “jobless” US economic recovery                                          12                                        ...
Stagnation: 93 episodes of long-lasting (6+ years) ofsub-par GDP per capita growth during last 150 y    p        p     p g...
Recent GDP per capita growth trend in US is     currently following the typical stagnation p             y         g      ...
Path of real total equity returns during 43 economicstagnations in OECD countries since 1950   g              US path (200...
S&P 500 sales, margins and EPS forecastsGoldman Sachs top-down vs. consensus bottom-up                p                   ...
Decomposition of S&P 500 earnings estimatesWe forecast operating EPS of $96 in 2011 and $98 in 2012                       ...
Goldman Sachs top-down and consensus bottom-up2011 and 2012 EPS estimates                                         115     ...
3Q results: 13% year/year sales growth, 37 bp marginexpansion, and 18% EPS growth; Apple is key driver!  p       ,        ...
Goldman Sachs 2012 US GDP growth forecastrelative to consensus                                                      Distri...
Sensitivity of 2012 S&P 500 earnings estimate toUS GDP growth (100 bp ≈ $5/share)         g       (    p $          )     ...
We forecast margins will peak in 2011 and decline in2012 while consensus expects margins will keep rising                 ...
Sensitivity of 2012 S&P 500 earnings estimate tosales and margin assumptions (50 bp ≈ $               g        p      (   ...
Decomposition of S&P 500 net margin estimates    We forecast 2012 margin contraction in six sectors                       ...
Information Technology & Consumer Discretionary       margins are particularly elevated relative to history           g   ...
Five approaches to S&P 500 fair value P/E multiple                                                                     Imp...
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Goldman 7 nov 2011

  1. 1. The Goldman Sachs Group, Inc. Goldman Sachs Research Where to Invest Now Record profits but cautious outlook November 7, 2011 David J. Kostin Chief US Equity Strategist Global ECS Research -- US Portfolio Strategy Goldman, Sachs & Co. 212-902-6781 david.kostin@gs.comThe Goldman Sachs Group, Inc. does and seeks to do business with companies covered in its research reports. As a result, investors should be awarethat the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor inmaking their investment decision.For RF Reg AC certification, see the end of the text. Other important disclosures follow the Reg AC certification, or go to www.gs.com/research/hedge.html. tifi ti th d f th t t Oth i t t di l f ll th R tifi ti t / h/h d ht lAnalysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.
  2. 2. US equity market outlook Record profits but cautious outlookIndex: We forecast 5% return to our 12-month S&P 500 target of 1300 • Economy: Faltering US economy growing by 1.8% in 2011 and 1.6% in 2012; low inflation; low interest rates. S % % f • Earnings: We forecast operating EPS of $96 in 2011 and $98 in 2012 (bottom-up consensus is $98 and $108). • Valuation: 1200 target in Dec. 2011 reflects forward P/E ratio of 12.2X. DDM supports our 12-month target of 1300.Risks: Economy, Margins, and Policy Economy Margins • Economy: US data remains weak. 9.3% jobless rate forecast for year-end 2012. • Margins: We forecast net margins will peak in 2011 and begin to decline in 2012. Consensus expects margins to rise. • Policy: In US, budget negotiations. In Europe, sovereign debt crisis. In Asia, policy responses to inflation.Sectors: Stay near benchmark given macro uncertainty and transitioning business cycle • Overweight: Information Technology, Consumer Staples, and Telecom Services • Underweight: Consumer Discretionary, Industrials, and MaterialsThemes: High “Quality” stocks; Dividend yield and growth; and Defensives 1. High “Quality”. 50 stocks with safe balance sheets, stable sales growth, and reliable earnings (<GSTHQUAL>). 2. Dividend Growth. Low rates suggest stocks with high dividend yields and growth will outperform (<GSTHDIVG>). 3. Defensives. 11 of 24 S&P 500 industry groups spanning 7 of 10 sectors have below average betas (<GSSBDEFS>). 3 D f i f i d t i f t h b l b t (<GSSBDEFS>) Note: The ability to trade baskets will depend upon market conditions, including liquidity and borrow constraints at the time of trade. Goldman Sachs Global ECS Research 2
  3. 3. Goldman Sachs S&P 500 price targetsS&P 500 EPS to exceed prior peak and reach $96 in 2011 1700 110 09-Oct-07 2011 EPS 24-Mar-00 New Peak = 1565 above Peak P k = 1527 prior peak i k $98 100 $96 1500 S&P 500 90 Price $84 12-mo 1300 1300 Target 80 Jun-07 1250 6-mo S&P 500 EPS& 500 Price Target Peak EPS = $91 1200 70 2011 1100 Year-End Sep-00 Target Peak EPS = $57 Current 60 Mar 04 Mar-04 &P PS New Peak EPS SPX 1261 900 50 S&P 500 EPS 40 700 Goldman Sachs 09-Mar-09 Forecasts 30 Low = 678 500 20 c-96 c-97 c-98 c-99 c-00 c-01 c-02 c-03 c-04 c-05 c-06 c-07 c-08 c-09 c-10 c-11 c-12 c-13 c-14 Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec DecSource: Compustat, IDC via Factset, FirstCall and Goldman Sachs Global ECS Research. As of November 3, 2011.Goldman Sachs Global ECS Research 3
  4. 4. Our US equity market forecasts and key assumptions 1. Global economic growth will equal 3.8% in 2011 and 3.5% in 2012. Our economists forecast a moderate recession in the Eurozone with negative real GDP growth in 4Q 2011 and 1Q 2012. Our outlook remains robust in Asia with China expanding by 9.1% in 2011 and 8.6% in 2012. p 2. US economic expansion will average 1.8% in 2011 and 1.6% in 2012. We estimate a 100 g bp shift in US GDP growth equates to about $5/share of S&P 500 EPS. Unemployment will remain high and end 2012 at 9.3%. 3. Inflation in 2012 as measured by core CPI and personal consumption expenditures (PCE) will remain contained at 1.7% and 1.5%, respectively. 4. Earnings per share (EPS) will grow by 14% in 2011 to $96 but expand by only 3% to $98 in 2012. Bottom-up consensus S&P EPS estimates are $98 and $108 respectively but have been revised modestly l b i d d tl lower d i th past t during the t two months. Th majority of th $10 gap th The j it f the between top-down and bottom-up EPS forecasts stems from different margin outlooks. 5. Profit margins will decline by 30 bp to 8.6% in 2012 from a peak of 8.9% in 2011. We estimate a 50 bp shift in profit margin equates to a $5/share reduction in earnings Bottom up earnings. Bottom-up analysts forecast margins will continue to expand and reach 9.5% in 2012.Goldman Sachs Global ECS Research 4
  5. 5. Our US equity market forecasts and key assumptions((continued) ) 6. Valuation in the current uncertain economic environment is challenging. Our dividend discount model (DDM) anchors our 12 month target of 1300. Our uncertainty-based P/E multiple model 12-month uncertainty based suggests downside fair value of 9.4x bottom-up EPS, or roughly 1020. 7. Defensive sectors should outperform given the weak economic backdrop. We recommend investors overweight Consumer Staples, Telecom Services, and Information Technology; and Underweight g p gy g Consumer Discretionary, Industrials, and Materials. 8. Recommendation: Goldman Sachs US Portfolio Strategy baskets (Bloomberg ticker: <GSTH>) High Quality. High geopolitical and policy uncertainty, slow economic growth, and low bond yields favors stocks with safe balance sheets, stable revenue growth, and reliable earnings. Buy our sector- neutral basket of 50 high quality stocks. (<GSTHQUAL>). Dividend Growth. Low rates suggest stocks with high dividend yields and growth will outperform (<GSTHDIVG>). Defensives. 11 of 24 S&P 500 industry groups spanning 7 of 10 sectors have below average betas to the US economy (<GSSBDEFS>).Goldman Sachs Global ECS Research 5
  6. 6. Goldman Sachs 3- and 12-month forecasts Forecasts Total Total Units Current 3m Return 12m Return Equities TOPIX level 739 800 9% 870 20 % Asia Pac Ex-Japan level 412 450 10 480 20 DJStoxx 600 level 242 255 6 275 18 S&P 500 level 1261 1200 (4) 1300 5 Ten Year Rates Euroland % 1.9 2.0 0% 2.3 (1)% US % 2.1 2.3 (1) 2.5 (2) Japan % 1.0 10 1.1 11 (1) 1.3 13 (2) Currencies Sterling / US Dollar £/$ 1.60 1.53 (4)% 1.76 10 % Euro / US Dollar EUR/$ 1.37 1.38 0 1.48 8 US Dollar / Yen $/¥ 78 77 (1) 74 (5) Energy WTI Crude Oil $/bbl 94.07 96.5 3% 116 23 % NYMEX Nat. Gas $/mmBtu 3.78 4.50 19 4.25 12 Brent Crude Oil $/bbl 111 112.5 2 122.5 11 Metals LME Copper $/mt 7915 8000 1% 9500 20 % London Gold $/troy oz 1765 1645 (7) 1860 5Source: FactSet and Goldman Sachs Global ECS Research. As of November 3, 2011.Goldman Sachs Global ECS Research 6
  7. 7. Goldman Sachs Economics forecasts GDP growth of 3.5% for World, 1.6% for US, and 7.2% for BRICs , , 2011E and 2012E GDP Growth by country 2011E 2012E Goldman Goldman GS vs. Sachs S h Sachs C S h Consensus C Consensus China 9.1 % 8.6 8.5 % 10 bp Japan (0.6) 2.2 2.2 0 UK 1.0 10 1.3 13 1.5 15 (20) BRICs 7.4 7.2 7.4 (20) World 3.8 3.5 3.8 (30) USA 1.8 1.6 2.0 (40) Russia 4.2 3.5 4.0 (50) Euroland 1.6 0.1 0.6 (50) Brazil 3.3 3.0 3.9 (90) India 7.0 7.4 8.4 (100)Source: Blue Chip Economic Indicators, Consensus Economics and Goldman Sachs Global ECS Research. As of November 4, 2011.Goldman Sachs Global ECS Research 7
  8. 8. Goldman Sachs forecasts US real GDP growth of 1.8% in 2011 and 1.6% in 2012 GS Economics and consensus quarterly GDP forecasts Goldman Sachs US Economics forecasts % Annual Change 5.0 % 2010A 2011E 2012E 4.5 % Real GDP 3.0% 1.8% 1.6% alized %) 4.0 % Consumer Spending 2.0 2.3 1.5 Total Fixed Investment 2.6 6.9 5.3 3.5 % Business Fixed Investment 4.4 44 9.0 90 5.7 57GDP Growth (qoq annua Goldman Sachs Consensus Residential Investment (4.3) (1.7) 3.7 3.0 % Economics Federal Government Spending 4.5 (1.6) (0.9) 2.5 % Exports of Goods and Services 11.3 6.6 1.4 2.0 % 3.9 3.8 Imports of Goods and Services 12.5 4.8 1.2 Inflation 1.5 % 2.5 2.5 2.5 Producer Price Index 4.2 6.1 2.8 2.3 G 1.0 % 2.0 2.0 Headline CPI 1.6 3.2 2.2 1.3 1.5 0.5 % Core CPI 1.0 1.7 1.7 0.4 0.5 Core PCE 1.4 1.5 1.5 0.0 % Unemployment Rate 9.6 9.0 9.2 Q1A Q2A Q3A Q4A Q1A Q2A Q3A Q4E Q1E Q2E Q3E Q4E Fed Funds Rate 0.2 0.1 0.1 2-year Treasury Rate 0.6 0.3 0.5 2010 2011 2012 10 year 10-year Treasury Rate 3.3 33 2.3 23 2.8 28 Source: Bloomberg and Goldman Sachs Global ECS Research. As of November 4, 2011. Goldman Sachs Global ECS Research 8
  9. 9. Sputtering labor market means unemployment rate will remain above 9% through y g year-end 2012 Weak i t W k private payrolls growth ll th Unemployment rate currently above 9% U l t t tl b 400 12 +2.6 Million Forecasts Private Payrolls Cumulative 11 Unemployment Rate usands) 200 Goldman 10 SachsChange in Private Payrolls (Thou 0 ployment Rate (%) 9 8 Consensus (200) 7 (400) 6 Unemp 5 (600) -8.8 Million Cumulative 4 (800) 3 2 (1,000) 90 92 94 96 98 00 02 04 06 08 10 12 14 Jan-9 Jan-9 Jan-9 Jan-9 Jan-9 Jan-0 Jan-0 Jan-0 Jan-0 Jan-0 Jan-1 Jan-1 Jan-1 2000 0 2001 2002 2 2003 3 2004 4 2005 5 2006 6 2007 7 2008 8 2009 9 2010 0 2011 2012 2 Source: Department of Labor, Bureau of Labor Statistics, and Goldman Sachs Global ECS Research. As of November 2, 2011. Goldman Sachs Global ECS Research 9
  10. 10. Consumer confidence back to March 2009 low; ISM level now 50.8, down from 61.4 peak in February , p y Weak consumer sentiment consistent ISM above 50 with contraction in final sales (indicating expansion) for 27 monthsPercent change, year ago Index7.5 120 100 90 1105.0 75 80 100 US ISM yoy change2.5 50 70 US ISM level 90 ISM level, rhs 25 600.000 80 y 70 0 50(2.5) 60 ISM momentum (25) (yoy change, lhs) 40(5.0) Real Domestic Final Sales (lhs) 50 University of Michigan Consumer Sentiment (rhs) (50) 30 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11(7.5) 40 Jul-08 Jul-09 Jul-10 Jul-11 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 Source: ISM, BEA, US Treasury, University of Michigan and Goldman Sachs Global ECS Research. As of November 1, 2011. Goldman Sachs Global ECS Research 10
  11. 11. US housing prices are 32% below peak S&P/Case-Shiller 20-City Composite Home-Price Index Current Δ from Δ from City Level High Low220 Las Vegas 95 60 % 0% 207 Phoenix 99 57 0 Miami 140 50 1200 Tampa 128 47 0 Detroit 72 44 7180 San Francisco 132 40 9 San Diego 152 40 5 Los Angeles 167 39 4160 32% from Minneapolis 113 35 2 High Composite 20 141 32 0 141 Chicago 116 32 2140 141 Seattle 135 29 0 Portland 133 28 0120 Washington DC 184 27 8 Atlanta 100 27 0 New York 167 23 2100 Cleveland 99 20 0 n-00 n-01 n-02 n-03 n-04 n-05 n-06 n-07 n-08 n-09 n-10 n-11 n-12 Charlotte 111 17 1 Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Boston 153 15 3 Denver 123 12 0 Dallas 114 9 0Source: Standard & Poor’s, Fiserve, and Goldman Sachs Global ECS Research. As of October 25, 2011. Goldman Sachs Global ECS Research 11
  12. 12. Another “jobless” US economic recovery 12 12 11 Recoveries: 11 Nonfarm E N f Employment l t Change from end of reccesion (pct pts) 10 1954 - 1982 10 9 2001 9 8 1991 8 2009 Current Cycle y 7 7 6 6 5 5 4 End of Recession 4 (June 2009 in e 3 current cycle) 3 2 2 1 1 0 0 C (1) (1) (2) (2) -12 -6 0 +6 +12 +18 +24 +30 +36 Months from End of RecessionSource: Bureau of Labor and Statistics and Goldman Sachs Global ECS Research. As of October 31, 2011.Goldman Sachs Global ECS Research 12
  13. 13. Stagnation: 93 episodes of long-lasting (6+ years) ofsub-par GDP per capita growth during last 150 y p p p g g years 100% 90% 22 10+ 80% 1950-2010 70% 56 62 OECD 28 8-9 60% 50% 40% 30% 26 43 6-7 1900-1950 20% Non- 31 OECD 10% 11 1800-1900 0% … By duration (years) … By epoch … By regionSource: Barro-UrsuaMacro data and Goldman Sachs Global ECS Research. As of September 28, 2011.Goldman Sachs Global ECS Research 13
  14. 14. Recent GDP per capita growth trend in US is currently following the typical stagnation p y g yp g path t-1=100 120 Mean + 1SD 110 Japan (1992-2003) 100 Mean Stagnation Path US Mean - 1SD 90 (2008-12E) Stagnation Begins 80 t-5 t-4 t-3 t-2 t-1 t t+1 t+2 t+3 t+4 t+5 t+6 t+7 t+8 t+9Source: Barro-Ursua data and Goldman Sachs Global ECS Research. As of November 4, 2011.Goldman Sachs Global ECS Research 14
  15. 15. Path of real total equity returns during 43 economicstagnations in OECD countries since 1950 g US path (2008-12E) is currently following Japan experience (1993-2003) t-1=100 180 Mean Stagnation 160 + 1SD Mean Equity q y Return (+9.4%) 140 Mean Stagnation Return (+7.1%) 120 US 100 (2008-12E) 80 Stagnation 60 Begins Mean Stagnation Japan - 1SD (1992-2003) ( ) 40 t-5 t-4 t-3 t-2 t-1 t t+1 t+2 t+3 t+4 t+5 t+6 t+7 t+8 t+9Source: Barro-Ursua data and Goldman Sachs Global ECS Research. As of October 19, 2011.Goldman Sachs Global ECS Research 15
  16. 16. S&P 500 sales, margins and EPS forecastsGoldman Sachs top-down vs. consensus bottom-up p p Top-down Bottom-Up GS Forecast Consensus 2010 2011E 2012E 2011E 2012E S&P 500 ex-Financials and Utilities Sales Per Share $785 $861 $903 $870 $916 Y/Y growth 10 % 5% 11 % 5% Y/Y growth ex- Energy 7 4 8 5 Profit Margin 8.5% 8.9% 8.6% 9.0% 9.5% EPS $67 $77 $78 $79 $87 Y/Y growth 15% 1% 17% 10% Utilities EPS $3 $3 $3 $3 $3 Financials EPS 14 16 17 16 18 S&P 500 EPS $84 $96 $98 $98 $108 Y/Y growth 14% 3% 17% 11%Source: Compustat, FirstCall, I/B/E/S, and Goldman Sachs Global ECS Research. As of October 31, 2011.Goldman Sachs Global ECS Research 16
  17. 17. Decomposition of S&P 500 earnings estimatesWe forecast operating EPS of $96 in 2011 and $98 in 2012 Contribution to EPS Annual earnings growth rates GS Top-Down EPS Bottom-Up GS Top-Down Bottom-Up 2010A 2011E 2012E 2011E 2012E 2011E 2012E 2011E 2012E Information Technology $15 $18 $18 $18 $21 19 % 1% 19 % 15 % Energy Energ 10 14 14 15 15 35 3 40 5 Health Care 11 12 12 12 13 10 4 11 9 Consumer Staples 9 9 10 9 10 7 6 6 8 Industrials 8 9 9 10 11 11 1 16 14 Consumer Discretionary 8 8 8 9 10 2 (6) 10 9 Utilities 3 3 3 3 3 2 (1) 2 (1) Materials 3 3 3 4 4 27 (15) 34 11 Telecom Services 2 2 3 2 2 (2) 17 (2) 8 S&P 500 ex-Financials 70 80 81 82 90 14 1 17 10 Financials 14 16 17 16 18 15 10 18 15 S&P 500 Operating EPS $84 $96 $98 $98 $108 14 % 3% 17 % 11 % Numbers may not add due to rounding. Source: Compustat, FirstCall, and Goldman Sachs Global ECS Research. As of October 27, 2011. Goldman Sachs Global ECS Research 17
  18. 18. Goldman Sachs top-down and consensus bottom-up2011 and 2012 EPS estimates 115 Consensus 2012E EPS S&P 500 Earnings Per Share 110 $108 S $106 105 $104 $102 Goldman Sachs Consensus 2012E EPS 100 2011E EPS $98 $98 95 $96 Goldman Sachs 2011E EPS 90 30-Nov 28-Feb 31-Oct 31-Jul 31-Jan 31-Mar 30-Jun 31-May 30-Apr 31-Dec 31-Dec 31-Aug 30-SepSource: Compustat, FirstCall, and Goldman Sachs Global ECS Research. As of October 27, 2011.Goldman Sachs Global ECS Research 18
  19. 19. 3Q results: 13% year/year sales growth, 37 bp marginexpansion, and 18% EPS growth; Apple is key driver! p , g ; pp y 3QE 2011 Bottom-up Consensus EPS Sales Margin $/Share Growth $/Share Growth Level Change Energy $4.12 65 % $44 33 % 9.4 % 182 bp Materials 0.83 25 10 13 8.0 76 Financials 4.41 22 NM NM NM NM Industrials 2.56 2 56 16 31 10 8.4 84 46 Consumer Discretionary 2.23 12 32 6 6.9 34 Info Tech 4.36 11 27 11 16.0 5 Consumer Staples 2.38 6 37 11 6.5 (27) Utilities 1.12 4 NM NM NM NM Telecom Services 0.58 4 8 1 6.9 18 Health Care 2.85 2 32 9 8.9 (66) S&P 500 $25.45 18 % ex. Financials and Utilities 19.92 18 $221 13 % 9.0 % 37 bp Apple (APPL) pp ( ) $ $0.73 53 % $ $3 38 % 23.4 % 223 bp p Excluding Apple S&P 500 $24.72 17 % ex. Financials and Utilities 19.19 17 $218 13 % 8.8 % 31 bp Info Tech 3.64 3 64 6 24 8 15.0 15 0 (37) Source: Compustat, FirstCall, I/B/E/S, Bloomberg, and Goldman Sachs Global ECS Research. As of November 4, 2011. Goldman Sachs Global ECS Research 19
  20. 20. Goldman Sachs 2012 US GDP growth forecastrelative to consensus Distribution of 2012 US GDP forecasts 10 2012 US GDP F Forecasts t Consensus n=51 2.0% 8 ts Number of Forecast 6 4 r Goldman Sachs 1.6% 2 0 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4 2.6 2.8 3.0 3.2 2012 GDP Growth (%)Source: Blue Chip Economic Indicators, and Goldman Sachs Global ECS Research. Consensus estimates as of October 10, 2011.Goldman Sachs Global ECS Research 20
  21. 21. Sensitivity of 2012 S&P 500 earnings estimate toUS GDP growth (100 bp ≈ $5/share) g ( p $ ) Sensitivity of 2012 EPS forecast to US GDP growth 2012 US GDP (1.4)% (0.4)% 0.6 % 1.6 % 2.6 % 3.6 % (3)% (2)% (1)% 0 1% 2% 3.3 % 83 88 93 98 103 108 2011 US GDP P 2.8 84 89 93 98 103 108 2.3 84 89 93 98 103 108 1.8 84 89 94 98 103 108 98 1 1.3 13 84 89 94 103 108 0.8 84 89 94 98 103 108 0.3 84 89 93 98 103 108Source: Goldman Sachs Global ECS Research. As of November 4, 2011.Goldman Sachs Global ECS Research 21
  22. 22. We forecast margins will peak in 2011 and decline in2012 while consensus expects margins will keep rising p g p g S&P 500 net profit margins 11% 2012 10% S&P 500 Net Profit Margin Bottom-up Consensus (trailing four quarters) Forecast 9.5 9% 8.6 86 8.9 8% 7% 6% 5.9 Goldman Sachs 5% Portfolio Strategy 4.7 47 4% Forecast 3.8 3% c-79 c-81 c-83 c-85 c-87 c-89 c-91 c-93 c-95 c-97 c-99 c-01 c-03 c-05 c-07 c-09 c-11 c-13 c-15 Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Dec Source: Compustat and Goldman Sachs Global ECS Research. As of October 27, 2011. Goldman Sachs Global ECS Research 22
  23. 23. Sensitivity of 2012 S&P 500 earnings estimate tosales and margin assumptions (50 bp ≈ $ g p ( p $5/share) ) Sensitivity of 2012 EPS forecast to sales growth and margin 2012 Profit Margin 6.6 % 7.1 % 7.6 % 8.1 % 8.6 % 9.1 % 9.6 % 10.1 % 10.6 % 7.9 % 82 87 91 96 101 105 110 115 119 owth 6.9 81 86 91 95 100 104 109 114 118 201 Sales Gro 5.9 59 81 85 90 95 99 104 108 113 117 4.9 80 85 89 94 98 103 107 112 116 3.9 80 84 89 93 98 102 107 111 116 2.9 79 84 88 92 97 101 106 110 115 12 1.9 79 83 87 92 96 101 105 109 114 0.9 78 82 87 91 95 100 104 108 113Source: Goldman Sachs Global ECS Research. As of October 31, 2011.Goldman Sachs Global ECS Research 23
  24. 24. Decomposition of S&P 500 net margin estimates We forecast 2012 margin contraction in six sectors g Net Margin Annual margin expansion GS Top-Down Margin Bottom-up GS Top-Down Bottom-Up 2011E 2012E 2011E 2012E 2011E 2012E 2011E 2012E Telecom Services 6.8 % 7.9 % 6.6 % 6.9 % (7)bp 110 bp (27)bp 25 bp Health Care 9.4 9.5 9.4 10.2 27 11 26 76 Consumer Staples 6.4 6.4 6.4 6.6 (3) (3) (11) 29 Industrials 7.9 7.7 8.0 8.6 25 (20) 37 57 Consumer Discretionary 6.4 5.9 6.9 7.1 (15) (50) 29 22 Information Technology 16.7 16.2 16.7 17.7 87 (55) 92 92 Energy 8.8 8.2 9.0 8.8 83 (60) 106 (20) Materials 8.7 7.3 8.8 9.2 125 (145) 135 42 S&P 500 Net Margin 8.9 % 8.6 % 9.0 % 9.5 % 41 bp (31)bp 51 bp 42 bpSource: Compustat, FirstCall, I/B/E/S and Goldman Sachs Global ECS Research. As of October 31, 2011.. Goldman Sachs Global ECS Research 24
  25. 25. Information Technology & Consumer Discretionary margins are particularly elevated relative to history g p y y Information Technology net profit margin Consumer Discretionary net profit margin20% 9% Bottom-up Consensus 2012 Bottom-up Consensus18% Info Tech 17.8 8% Consumer Discretionary 2012 Forecast Forecast Net Profit Margin Net Profit Margin 7.216% 16.2 7%14% 6% 5.912% 5%10% 4%8% 3%6% Goldman Sachs % 2%4% Portfolio Strategy Goldman Sachs Forecast 1% Portfolio Strategy2% Forecast0% 0% Dec-79 Dec-84 Dec-89 Dec-94 Dec-99 Dec-04 Dec-09 Dec-14 Dec-19 Dec-79 Dec-84 Dec-89 Dec-94 Dec-99 Dec-04 Dec-09 Dec-14 D D D D D D D D D D D D D D D D D Source: Compustat, I/B/E/S, FirstCall and Goldman Sachs Global ECS Research. Goldman Sachs Global ECS Research 25
  26. 26. Five approaches to S&P 500 fair value P/E multiple Implied Year-End 2011 Fair Value P/E Price Methodology Multiple Level Upside US Portfolio Strategy DDM 12.2X 1200 (5) Uncertainty-based Model 9.4 1020 (19) Top-down P/E Regression 13.1 1420 13 Fed Model 14.3 1540 22 Cyclically Adjusted P/E 16.7 16 7 1250 (1)Source: Goldman Sachs Global ECS Research. As of November 3, 2011.Goldman Sachs Global ECS Research 26
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