Citi Research has lowered its S&P EPS targets for the end of this year and for 2014, based on slightly weaker numbers from Europe, the possibility of a tax increase, and lack of confidence outside the investment class, according to a note from Citi Research analysts Tobias Levkovich, Lorraine Schmitt, and Christina Wood.

Citi lowered its GDP forecast for developing economies

With 92 percent of the S&P 500 (INDEXSP:.INX) reporting, earnings came in about 1 percent below the Citi forecast, though it was 3 percent better than Street numbers which had already been revised down. Additional reports from Europe show that it is recovering more slowly than many people had hoped, and Citi has separately lowered its GDP forecast for developing economies from 5.3 percent to 4.7 percent, impacting global demand. There is also some concern that the consensus isn’t considering the potential impact of a tax increase.

sp500 ebit vs aftertax Citi

“Margins have been supported of late by lower tax rates that cannot be considered sustainable,” says Levkovich, “and we suspect that few investors have necessarily focused on this issue.”

While it’s true the after-tax earnings have been increasing, S&P 500 EBITs have actually been falling for the last two years. The difference has been made up by lower effective corporate tax rates and rock-bottom interest rates, neither of which can be relied on to boost profits over the next year. Taking this into account puts Citi’s targets at $109.50 and $116.25 for 2013/2014 EPS, down from $110.00 and $117.00 respectively. Those targets are below bottom-up consensus expectations, though still above the top-down consensus forecast.

Levkovich also thinks that the S&P 500 (INDEXSP:.INX) has overshot slightly and will need to come down by the end of the year. He says that there isn’t enough popular enthusiasm to sustain it, and that an earnings-driven model puts the index at about 1,615.

“The sheer volume of money that might flow into equities from cash in bank accounts and money market funds, not to mention the amount that could swap out of bonds, is vast,” says Levkovich. “But, we suspect that it will take time for that kind of conviction to return en masse towards the stock market given the past decade and a half of bubbles and bubbles bursting, especially when confidence is still subdued by concerns about jobs, health care, government dysfunction and even geopolitical events.”

industrial production vs sp500