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Goldman Sachs rethinks its stock market outlook because of something that hasn't happened in at least 48 years
(Screengrab via Bloomberg)
David Kostin.
Just a few weeks ago, analysts were comfortable assuming that oil prices would finally stabilize and perhaps begin to recover in 2016. But that once reasonable assumption on Wall Street is turning into a disaster.
Goldman Sachs is the latest firm to warn its clients that tumbling oil prices are bad news for stocks.
"We lower our S&P 500 [earnings per share] forecast by $3 to $106, $117, and $126 for 2015, 2016, and 2017, reflecting annual growth of -7%, +11% and +8%, respectively," Goldman Sachs' David Kostin said. "Energy is the leading driver of our reduced profit outlook."
Kostin follows Deutsche Bank's David Bianco and RBC Capital's Jonathan Golub in issuing this type of alert to clients.
"This seemed reasonable several weeks ago," Bianco said regarding his assumption that oil prices would average $55 a barrel in 2016. "But now it doesn't."
It's a remarkable turn of the tide when you consider that many of these forecasts were published just weeks ago. Kostin's was published November 23.
These warnings speak to the challenge of forecasting markets, especially the energy markets. Indeed, what's happening in the oil business has been unprecedented over at least the past five decades.
"We expect Energy will post a $2 per share loss in 2015 EPS, the first time that [last-twelve month] Energy EPS has been negative since our data series began in 1967," Kostin said. "The write-down in Energy company assets has exacerbated the earnings hit from the 35% fall in Brent crude oil prices in 2015 following a 48% plunge in the commodity price in 2014."
Kostin noted that the sector accounted for 12% of S&P EPS back in 2014.
Oil was trading near $40 a barrel a month ago when Wall Street's strategists were rolling out their 2016 stock market targets. Now, it's trading near the low $30s. And the S&P 500 has significant exposure to oil prices. The energy sector has been the primary source of weakness in stock prices and earnings.
On Wednesday, Oppenheimer's Fadel Gheit warned 2016 could be a worse year for energy stocks than 2015.
Kostin, meanwhile, maintains his 2016 year-end target of 2,100.
(FinViz)
West Texas Intermediate oil prices.
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