Goldman Sachs's bearish call

We expect a US private non-residential downturn in 2009-2010. Following strong growth in 2004-2008, we expect US private non-residential construction spending to decline 10% in 2009 and 5% in 2010, based on (1) a slowdown of the US economy, (2) rising unemployment and office vacancy rates, and(3) sharply tighter credit, which the Goldman Sachs Financials team expects to result in a 20%-plus decline in commercial property values through 2009. Stocks with significant exposure to US non-residential construction have declined about 27% (-1,200 bp vs. S&P 500) since their July 2007 peaks. However, in the last two cycles, stocks with high non-residential exposure fell about 50% and underperformed by about 1,600 bp. Valuations have come down, but estimates have not. P/E multiples have tightened about 30% since July 2007 for these stocks, but consensus EPS revisions have remained positive. We believe downward revisions are more likely in late 2008 and 2009 given the long lead-times associated with running off backlogs. Resolution of the current credit market unrest remains unclear and holds the key to the question, “how bad will it get?” Our bias is to the downside.