Goldman Sachs said on Tuesday it has raised its 2019 target for the US benchmark S&P 500 index by 3% to 3,100, implying a 24% gain for the year, but has lowered its earnings estimates citing weakness in economic activity and margin outlook.
The forecast would see Wall Street extend its decade-long bull run into another year and easily breach its intraday record of 3,027.98 set on Friday as investors bet on a boost from an expected rate cut from the Federal Reserve this week.
"The dovish Fed pivot has driven the equity market rally in 2019, and we expect low interest rates will continue to support above-average valuations going forward," Goldman Sachs analysts wrote in a note.
Though Goldman expects markets to finish 2019 with the best annual performance since 2013, it sees a slowdown in 2019 earnings per share growth for S&P 500 companies at just 3%, a far cry from the 23% it recorded last year, when US President Donald Trump's corporate tax cuts fueled gains.
The bank also expects corporate margins to contract by 39 basis points in 2019 due to rising input and labour costs and as companies face the effect of tit-for-tat tariffs by the United States and China in a protracted trade war, which increase costs.
"Most of the change in our earnings estimate is driven by weaker-than-expected economic activity, oil prices, and margins, particularly within semiconductors," Goldman Sachs added.
Their economists however expect a modest rebound in US and global economic growth and "idiosyncratic headwinds" within semiconductors to abate next year.
For 2020, the bank set a 3,400 point price target for the S&P 500, a 10% rise from its 2019 price target. It expects 2020 earnings growth of 6%, well below consensus of 11%.
"Negative EPS revisions typically accelerate after 2Q earnings season as investors and analysts shift their focus to the following calendar year."
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