Goldman Sachs cuts S&P 500 targets; sees December rate hike

Goldman Sachs cut its S&P 500 earnings forecasts and index price target, saying slower economic growth in the US and China and a lower oil price than it previously assumed translate into a reduced profit forecast and a lower trajectory for US stocks.

The bank cut its 2015 S&P 500 earnings per share forecast to $109 from $114, which represents a 3% year-on-year decline. Its new 2016 EPS estimate of $120 from $126 reflects annual growth of 10%, GS said.

Goldman cuts its 2015 year-end target to 2,000 from 2,100. The revised target suggests a 6% rise during the next three months, above the 4% average fourth-quarter return since 1950.

“S&P 500 has posted a negative 4Q return in just 22% of the last 65 years. If our target is realised, the 2015 S&P 500 price return will be -3% and the total return including dividends will be -1%,” the bank's analysts added.

The investment bank said it expects the US economy to grow by 2.4% in 2016, down from its previous estimate of 2.8%, as it cut its global growth forecasts outside the US to 3.7% from 4.3%.

"Our baseline forecast is that the US economy will grow at a modest pace, earnings will rise, and the S&P 500 index will climb slowly while the P/E multiple declines as interest rates rise.”

GS advised investors to focus on stocks with high US sales and firms returning cash to shareholders.

“Companies with high domestic sales will outperform, as will firms returning cash to shareholders via dividends and buybacks, and also high quality companies with strong balance sheets and stable sales and EPS,” it said.

In addition, GS said the Federal Reserve will likely begin its long-awaited tightening process this December.