Barclays slashes its S&P 500 forecast and says the benchmark index has 'limited upside' as consumer spending binge cools and earnings growth slows

• Barclays on Thursday cut its 2022 price and per-share earnings targets for the S&P 500.
• The S&P 500 forecast was trimmed to 4,500 from 4,800 and the EPS target was cut to $223 from $235.

Barclays on Thursday cut its S&P 500 price target and earnings outlook as it foresees consumers pulling back their spending on goods as the COVID-19 pandemic eases and oil prices jump.

The investment bank downgraded its 2022 S&P 500 forecast to 4,500 from 4,800 and reduced its per-share earnings view for the benchmark to $223 from $235. On Thursday, the S&P 500 stood at about 4,477.

"We believe that SPX earnings will have a greater difficulty in 2022 than currently anticipated, with the potential for a strong reversion in goods consumption that is underappreciated by current consensus expectations," said Barclays in a research note led by Jonathan Millar, deputy chief US economist, and Maneesh Deshpande, head of US equity derivatives strategy.

Consensus expectations for sales and per-share earnings for S&P 500 companies have strongly moved up during 2022 despite margin contraction in the fourth quarter of 2021, a slowdown in companies beating earnings expectations, and flattening goods consumption.

"We believe this is overly optimistic as our new base case of ~2 years for goods consumption to revert to trend should blunt FY22 EPS growth by ~11%," Barclays said. It had previously expected goods spending to revert over the next five years.

High goods consumption has been a key factor in driving up earnings growth over the last two years, the note said. COVID-19 lockdowns forced people to substitute certain services with goods – for example, switching from eating at restaurants to buying food to cook at home, or gym closures leading to sales of home exercise equipment. Work-from-home setups called for purchases of home office supplies as well. Cumulative excess goods spending reached $2 trillion above trend levels since the start of the pandemic, the bank said.

Spending on goods is likely to slow as the COVID pandemic wanes and as fiscal stimulus that aided households runs out. Spiking oil prices put further pressure on goods spending as consumers adjust their budgets to accommodate higher gas and energy costs by curtailing spending in other areas.