Goldman Sachs just got more pessimistic about the biggest companies in the US

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Goldman Sachs' outlook for the US' largest companies just got a bit gloomier.

The Goldman strategy team, lead by David Kostin, cut their earnings forecast for 2016, 2017, and 2018 S&P 500 earnings in a note to clients on Monday citing stagnant economic growth and sliding margins.

The analysts now expect 2016 EPS of $105 from $100, 2017 EPS of $116 from $123, and 2018 EPS of $122 from $130.

Kostin said the primary reasons for the decline in the near term are lower than expected growth in financial, information technology, and telecom services earnings. Low interest rates have kept financial earnings subdued, while information technology is facing declining margins, and telecoms companies have to deal with increasingly expensive pension plans.

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Fortune's top 10 companies
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Fortune's top 10 companies

AT&T
Fortune 500 Rank: 10
2015 Revenue: $146.8B

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Ford Motors
Fortune 500 Rank: 9
2015 Revenue: $149.6B

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General Motors
Fortune 500 Rank: 8
2015 Revenue: $152.4B

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CVS Health
Fortune 500 Rank: 7
2015 Revenue: $153.3B

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UnitedHealth Group    
Fortune 500 Rank: 6
2015 Revenue: $157.1B

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McKesson
Fortune 500 Rank: 5
2015 Revenue: $181.2B

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Berkshire Hathaway    
Fortune 500 Rank: 4
2015 Revenue: $210.8B

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Apple
Fortune 500 Rank: 3
2015 Revenue: $233.7B

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Exxon Mobil
Fortune 500 Rank: 2
2015 Revenue: $246.2B

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Wal-Mart    
Fortune 500 Rank: 1
2015 Revenue: $482.1B

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Kostin said that outside of sector-level issues, S&P500 earnings were also facing two economy-wide pressures for 2017 that will hurt their growth. They are:

  1. Stagnant US economic growth: It's hard for firms to outpace the broad economy, and with projected GDP growth just a hair over 2% for 2017, the S&P 500 has little hope of seriously breaking out. Any surprise to the upside, however, would be substantial. "We estimate that every 100 bp change in 2017 US GDP growth relative to our baseline assumption equates to a $5 change in 2017 S&P 500 EPS, or 5 percentage points (pp) of EPS growth," wrote Kostin.
  2. Profit margins won't get back to their record high: While margins will improve in 2017, aided mostly by an improving performance from the energy sector as oil bounces back, they will stay below their peak. "The precipitous decline in Energy sector margins, largely as a result of asset write-downs, accounts for the majority of the fall in S&P 500 margins," wrote Kostin. "However, declines outside of Energy have weighed on S&P 500 margins during the first half of 2016, particularly in the Information Technology sector."

Given the industry and economy-wide trends, said Kostin, this leaves his team with a slightly more sour view of earnings growth going forward.

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