Goldman cuts financials, admits goofed on upgrade

BANGALORE (Reuters) - Goldman Sachs & Co strategists urged stock investors on Monday to "underweight" U.S. financial and consumer shares, admitting it was wrong when it upgraded both sectors just seven weeks ago.

The downgrades sparked selling in the two sectors as investors feared that weakening consumer demand and deterioration in the credit markets will weigh on profitability.

"We boosted our consumer discretionary and financials weights in May on the belief the sectors would benefit from bank recapitalizations and fiscal stimulus," Goldman strategists led by David Kostin wrote. "Our thesis was clearly wrong in hindsight."

Goldman had previously urged investors to overweight consumer stocks and maintain a neutral weight in financials.

In afternoon trading, the Standard & Poor's Financials Index .GSPF was down 1.8 percent while the S&P Consumer Discretionary Index .GSPD was down 1.1 percent. The S&P 500 .SPX, in contrast, was up 0.2 percent.

Among the decliners was Merrill Lynch & Co MER.N, whose shares were down 3.4 percent after a Banc of America Securities analyst projected a wider loss for the securities firm.

Others that fell included Citigroup Inc (C.N), down 2.6 percent, Home Depot Inc (HD.N), down 4 percent, and General Motors Corp (GM.N), down 4.9 percent.

"Banks are what's weighing on the market," said Steve Goldman, a market strategist at Weeden & Co, citing the Goldman Sachs report.

Financial stocks had fallen 18 percent since the May 5 upgrade, compared with a 5 percent drop in the S&P 500, Goldman said, as investors grew increasingly worried that more lenders would cut their dividends and conduct dilutive capital-raisings as losses mounted from mortgages and other debt.