Goldman prices S&P 500 for "ugly scenario"

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NEW YORK (Reuters) - Goldman Sachs on Tuesday cut its forecast for earnings growth for companies that make up the Standard & Poor's 500 <.SPX> and said it expects the benchmark index to end 2008 at 1,675, pricing it "for an ugly scenario."

The 2008 year-end target for the S&P 500 marks a reduction of sorts in previous estimates by chief investment strategist Abby Joseph Cohen, who three weeks ago in Beijing said she expects the index to reach 1,680 by next summer.

Compared with current levels of about 1,465, the 2008 year-end target amounts to a rise of about 14 percent.

Recession is likely to be averted, operating profits will grow modestly in 2008 but vary widely by sector and the Federal Reserve, which has been cutting interest rates to boost the struggling U.S. economy, will likely stay market-friendly, she said.

"U.S. stocks will offer moderate gains and will dramatically outperform bonds over a 12-month horizon," Cohen said in one of two research notes Goldman released on its outlook for earnings growth and the U.S. stock market.

Goldman cut its earnings growth forecast for companies that make up the S&P 500 index for this year and next. It reduced earnings per share expectations in 2007 as write-downs and loan loss provisions weigh on results despite a strong first half.

Goldman cut its operating EPS forecasts to $90 from a previous $93 in 2007 and to $95 from $100 next year, the investment bank said in a separate research report.

The revised estimates call for annual EPS growth of less than 1 percent this year and mid-single digit growth in 2008, Goldman said in its report about earnings.

If Goldman's earnings growth forecast for 2008 is correct, the forward price-to-earnings ratio for S&P 500 stocks is about 15.6, well below the historical average since 1950 of 18.6 during previous periods of comparable inflation, it said.

The U.S. economy is expected to show the strains of the deflating housing market and credit market disruptions in early 2008, but a recession will likely be avoided, Goldman said.

Strength in exports and capital spending by corporations and government, and a vigilant and flexible Federal Reserve, will avert a recession.

(Reporting by Herbert Lash; additional reporting by Anant Vijay Kala in Bangalorem, Editing by Chizu Nomiyama)