November is almost here which will be highlighted by the presidential election. The market’s performance continues to be lackluster. The S&P 500 has gained less than three percent over the previous 15 months as the Federal Reserve is no longer goosing the market as they have done since the financial crisis.
Goldman Sachs reduced their S&P 500 earnings targets for the 2016 through 2018 this Monday. The investment bank now expects profits within the S&P 500 to be $105 in 2016, $116 in 2017 and $122 in 2018. It also expects margins to start to decline after 2017. This represents 5% earnings growth this year, 10% in 2017 and 5% in 2018. Given we have had five straight quarters of overall declines in the profits within the S&P 500, even this year’s earnings target might be a tad optimistic. Interestingly, despite lowering its earnings projections Goldman maintained its price targets for the S&P 500 over the coming three years.
Maybe Goldman is right and investors will continue to settle for less and less earnings growth and the market will continue to be bolstered as it is the only game in town thanks to the actions of the world’s central banks since the Great Recession. There was a great article in Barron’s about a month ago that detailed how 92% of the gains in the market over the past four years were not the result of earnings growth which was the primary driver in other bull markets. They were the result of the shrinking risk premium stocks garner over holding bonds.
Now, investors might continue to behave like those approaching “spinsterhood” and be willing to accept less and less as the bull market ages. However, at some point investors might eventually say enough and enough and not play this game anymore. This is especially true if we get an economic hiccup under a new administration. Given GDP growth is barely above stall speed over the past three quarters, it would not hard to see some outside event tipping the economy into at least a quarter or two of contraction.