Goldman Sachs Group Inc (NYSE:GS) continues to see gains for US stocks well into 2015. The investment bank has been watching carefully at 3Q earnings releases to determine outlook, growth, etc. So far, for the third quarter earnings releases, over 70% of firms have reported earnings, with about 32% beating estimates and 49% of firms reported positive earnings per share results. Overall, we have seen sales rise 5% and earnings per share rise 10%, year over year and that is certainly encouraging. Being that the Federal Reserve finally ended its QE bond buying program, but Goldman Sachs economists are still predicting another 11 months before a first rate hike. However, a surprise Bank of Japan announcement last week sent stocks and a basket of currencies against the Japanese Yen rocketing higher. The BOJ’s surprising extra bout of asset purchases will certainly provide support, as the world markets process the end of the US easing programs.
Goldman Sachs notes manufacturing remains strong
While we did get some surprise support last week, there still remains risk in economic outlook, political outlook and rising tensions around the globe. Economically, the US has experienced some unflattering numbers in the past month, but it should be mentioned that the US ISM Manufacturing PMI that came out November 3, 2014 at 10am ET came in above estimates at 59.0, whereas economists were forecasting 56.5. This is certainly good to see that manufacturing remains strong, but internationally, we are seeing a variety of hiccups and potential dangers. Right now, a major concern around the world is the risk of deflation and falling GDP. This certainly could hurt stocks moving forward.
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The economist team at Goldman Sachs has determined that for every 100 basis point change in US GDP, there is a $6 per share gain or loss in S&P 500 earnings. Additionally, a similar change in “world ex-US GDP” would have a $3 per share impact on earnings. Additionally, economists determined that based on a Brent crude price of $84, a $10 drop in prices in 2015 would have a positive effect on earnings. Goldman says that a $10 drop from those prices could make 2015 earnings per share rise by $1, but lift 2016 earnings per share by $4. That being said, a stronger US Dollar could put pressure on earnings. Every 10% change in strengthening or weakening of the dollar adds or subtracts $3 worth of earnings per share. Bottom line here is to keep an eye on the US Dollar and its potential earnings squeeze.
Goldman Sachs: US Dollar strength, crude oil prices to hurt stocks
Overall, Goldman does have some bullish forecasts ahead for stocks and earnings. Goldman Sachs forecasts 2014 S&P 500 EPS to rise 9% year over year, but sees 2015 EPS only post growth of 5%, compared to an overall consensus of 10% earnings growth next year. Overall stock performance outlook remains bullish at Goldman, with estimates that S&P 500 will close out 2014 at 2050, rise to 2100 in 2015 and continue higher to 2200 in 2016. Continue to watch economic reports and their strength, US Dollar strength, crude oil prices and potential geopolitical issues that may rise and hurt stocks moving forward.