Goldman Sachs now expects the S&P 500 to finish in the red in 2015.
Chief U.S. equity strategist David Kostin lowered his year- end price target for the S&P 500 to 2,000 from 2,100, citing slower than anticipated growth from the world's two biggest economies and lower than expected oil prices.
This drop of nearly 3 percent would be the benchmark index's first negative year since 2011, though this level also represents upside of more than 6 percent from where the S&P 500 closed on Monday.
Kostin's team lowered its estimate for calendar year earningsto $109 from $114, which would mark a decline of 3 percent from 2014.
Contracting earnings aren't the only cause of Goldman's new-found pessimism. "A lower path of profits is an obvious reason to lower a price target but the risks for the index level and price-to- earnings multiple have also increased," wrote Kostin.
Goldman's proprietary metrics suggest the Chinese economy is growing by roughly a full percentage point slower than the official data indicate, and the team downgraded its forecasts for U.S. and global growth in 2016.
Kostin alo notes that the political backdrop in Washington is as unstable as ever, with the resignation of John Boehner potentially setting the stage for another protracted showdown over raising the debt ceiling.
While some strategists contend that the initiation of a tightening cycle will be a positive for the U.S. dollar and also multiples, Goldman's team takes a different view.
"S&P 500 price-to-earnings multiple fell by an average of 8 percent during the three months following Fed 'liftoff' hikes in 1994, 1999, and 2004," wrote Kostin. "During the same episodes S&P 500 index fell by an average of 4 percent as growing earnings offset the multiple compression."
Kostin sees liftoff by the Federal Reserve in December as an event that will dampen any so-called Santa Claus rally. Rising bond yields, the strategist reasons, entail that investors will be willing to pay less for each dollar of earnings generated by S&P 500 companies.
"We expect the Treasury curve to bear flatten as short- rates rise at a faster pace than ten-year note yields during the next few years," he wrote. "Rising bond yields are consistent with lower multiples."