In this Monday, Sept. 24, 2012, file photo, Lloyd Blankfein, Chairman and CEO of Goldman Sachs, attends the Clinton Global Initiative in New York.Mark Lennihan/The Associated Press
The fourth-quarter earnings season is about 80 per cent complete, which gives Goldman Sachs strategists the green light for looking at 2014. They figure there are four things to watch for:
1. Improving U.S. economic growth – 3.1 per cent in 2014 and 3.2 per cent in 2015 – should translate into better sales growth. They estimate 6 per cent growth, year-over-year.
2. Good news on profit margins: They will hit peak levels of 8.9 per cent. Bad news on profit margins: Cost pressures will prevent further expansion. Indeed, Goldman Sachs is a tad conservative here, given that the consensus expected margins will rise to 9.4 per cent.
3. Earnings should rise 7 per cent. For the S&P 500, that means earnings will rise to $116. Based on the index's current level of 1,795, that implies an estimated price-to-earnings ratio of 15.5.
4. Their earnings estimates are 2 per cent below the consensus earnings-per-share estimates from analysts, meaning that Goldman Sachs expects downward revisions are coming. That's in line with revisions seen in 2012 and 2013.
Strategist David Kostin noted in January that the S&P 500 was no screaming "buy": Stocks are fairly valued, which means that gains in the S&P 500 are more likely to come from earnings growth rather than investors paying more for earnings. His year-end target is 1,900.
David Berman