Goldman Sachs Group Inc. strategists said the U.S. corporate earnings season got off to an ``awful'' start and shares will drop as companies slash forecasts for the rest of 2008.
``We expect generally disappointing results and a swath of lowered profit guidance that will drive the Standard & Poor's 500 Index lower,'' a team led by David Kostin, Goldman's New York- based U.S. investment strategist, wrote in a report today. General Electric Co., Alcoa Inc. and United Parcel Service Inc. reported profits or forecasts that trailed analysts' estimates last week.
Kostin, 44, said last month that the S&P 500 may finish the year at 1,380, down 6 percent from the end of 2007. The forecast is the most bearish since at least 2000 by Goldman, which profited last year as other investment banks lost money on subprime mortgages. Morgan Stanley, the second-biggest securities firm, said today that earnings are too high relative to the size of the U.S. economy.
The forecasts conflict with estimates by Wall Street analysts that S&P 500 companies will report a 14 percent rise in the third quarter and 55 percent growth in the fourth. Predictions of a ``speedy recovery'' are too optimistic and stocks will drop when investors view estimates with ``appropriate skepticism,'' Kostin wrote.
GE, Alcoa
He said worse-than-expected earnings from GE, the world's fourth-largest company by market value, and Alcoa, the third- biggest aluminum company, are harbingers. Analysts have reduced expectations for S&P 500 earnings growth during the second half of 2008 ``only slightly'' even after cutting first-quarter projections by 17 percent, Kostin wrote.
The S&P 500 retreated 2.7 percent to 1,332.83 last week after GE said the credit-market crisis caused an unexpected earnings decline, while slowing economic growth and rising energy prices eroded profit at Alcoa and UPS. The index slipped 0.3 percent to 1,328.32 today.
Kostin's predecessor as Goldman's chief forecaster for the U.S. stock market, Abby Joseph Cohen, predicted in December that the S&P 500 would rise 14 percent to 1,675 in 2008. Cohen, 56, was known for her bullish predictions during the 1990s at New York- based Goldman, the most-profitable securities firm.
The S&P 500 has declined 15 percent from its all-time high of 1,565.15 in October. Kostin said in March that the benchmark for U.S. equities may drop to 1,160 before rebounding in the second half of the year.
Reduced Every Week
Analysts surveyed by Bloomberg have cut their projections for first-quarter earnings at S&P 500 companies every week since Jan. 4. They now predict a 12.3 percent drop, compared with an increase of 4.7 percent at the start of the year. Analysts have reduced their expectations for 2008 earnings growth to 11 percent from 15 percent in January, according to Bloomberg data.
In December, Goldman reported record earnings of $3.22 billion in the worst quarter for Wall Street in six years. The firm outmaneuvered competitors by profiting from the mortgage- backed securities market's slump.
``This is the first time in history where we have a very significant percentage of the Wall Street population that can make just as much money on the market going down as they can going up,'' Laszlo Birinyi, president of investment research and management firm Birinyi Associates Inc., said in an interview on Bloomberg Television last week.
Profit Halved
Alcoa kicked off the U.S. earnings reporting season on April 7, saying that first-quarter profit more than halved on surging energy costs, lower metals prices and a slumping U.S. dollar.
GE sparked a 2 percent decline in the S&P 500 on April 11 after the company unexpectedly cut its annual profit forecast and said quarterly earnings fell for the first time in five years.
Wachovia Corp. fell to the lowest since December 2000 today after the fourth-largest U.S. bank reported an unexpected loss because of subprime-infected mortgage holdings, cut its dividend and said it will raise about $7 billion.
``We certainly are going to see some pretty big surprises in the whole earnings season,'' Diane Garnick, a New York-based investment strategist at Invesco Ltd., said today in an interview on Bloomberg Television. ``It's not just limited to financial companies.''
Johnson & Johnson, the world's largest maker of consumer health-care products, is scheduled to report earnings tomorrow, while International Business Machines Corp., the biggest computer- services company, will follow a day later. Merrill Lynch & Co. reports April 17, while Citigroup Inc. posts results April 18.
After-tax corporate profits relative to U.S. gross domestic product are ``well above sustainable levels,'' Morgan Stanley strategist Gerard Minack wrote in a report today. He said a U.S. recession and increased competition will cause earnings to decline.
``If profits fall as much as I think they could, then markets are not cheap,'' Minack wrote.
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