Goldman Sachs and Wells Fargo warn 'delusional' investors on stocks
By Ambrose Evans-Pritchard,
International Business Editor
UK Telegraph
Last Updated: 1:58am BST 15/04/2008
Wall Street faces the growing risk of an equities bloodbath in coming months as the credit crunch spreads to the wider economy and earnings crumble, according to a pair of grim reports issued by Goldman Sachs and Wells Fargo.
Goldman Sachs said the key for equities will be the full-year guidance offered by companies.
David Kostin, the chief US investment guru for Goldman Sachs, expects the S&P 500 index of Wall Street equities to plummet a further 15 per cent over the "near term" as companies scramble to lower their outlook for this year.
"Although only a few firms have reported first quarter results, early signs are awful. We expect a swath of lowered profit guidance," he said in a research note published today, entitled 'Fasten Seatbelts'.
Mr Kostin, who replaced the ever-bullish Abby Cohen as chief strategist in December, expects the S&P index to reach 1,160, which would amount to a fall of 27pc from the bull market peak of 1,576 in September and enter the annals as a relatively severe bear market.
Goldman Sachs was the only major investment bank on Wall Street to turn a profit from the credit crunch, taking out huge "short" positions on sub-prime mortgage bonds before they went into a tailspin.
The firm's daily trading notes are one of the most closely watched sources in global finance.
Scott Anderson, chief economist at Wells Fargo, is equally pessimistic, describing the bullish views of some market players as "bordering on delusional".
"The equity markets have not yet priced in a prolonged downturn in economic growth in my opinion. We are still in the early stages of the credit crunch. Earnings estimates for the second half of the year are likely still far too high," he said.
Mr Anderson said investors should pay attention when the International Monetary Fund cuts its global growth forecast for 2008 three times in less than five months. The Fund has put the odds of a world recession at 25pc and predicted $945bn in losses from the credit debacle spread across banks, hedge funds, pension funds, and insurers.
"Even more alarming, the IMF estimates that only a quarter of these potential losses have been recognized," he said.
"Rarely do we ever see such uncertainty surrounding the economic and financial outlook. The forecasts for GDP growth in the second quarter of 2008 are currently all over the map. If you feel you must wade into equities at the present time, I would suggest spreading your bets widely," he said.
Goldman Sachs said the key for equities will be the full-year guidance offered by companies rather than first quarter profits. It cited the example of Bed Bath & Beyond, where the stock fell sharply last week after the firm said the earnings prospects for 2008 would be around 16pc below consensus estimates.
Mr Kostin said investors often "look through" downturns, preparing for the sunny uplands that lie on the other side as the cycle recovers. But the pattern in this bear market has been a series of earnings shocks precipitating sudden share price falls.
The implication is that investment funds have been caught badly off guard by the severity of the economic slump and are scrambling to catch up with reality.
Goldman Sachs and Wells Fargo warn 'delusional' investors on stocks
