Earnings risks are on the downside for the remainder of the year and management The comments will be especially important this earnings season given the current uncertainty, Goldman Sachs said.
Excluding the outlier sectors of outperforming energy (XLE) and underperforming financials (XLF), Goldman forecasts a modest 6% rise in the first quarter of the S&P 500 (SP500) (NYSEARCA: SPY) earnings.
“Full-year EPS estimates have actually been revised upwards by 2% year-to-date and earnings growth is expected to accelerate in coming quarters,” wrote strategist David Kostin. and his team in a note. “Analysts appear reluctant to properly adjust forecasts despite the high degree of uncertainty surrounding the economic outlook.”
“Although our top-down EPS estimate for 2022 is 3% lower than the bottom-up consensus ($221 vs. $227), we believe Q1 earnings season results are unlikely to generate enough clarity for analysts’ estimates fully converge with our forecasts.”
“We encourage management on their conference calls to address three key sources of investor uncertainty that will affect earnings through the remainder of 2022,” Kostin said.
- Prospects for economic growth and consumer demand. “The possibility of a recession has been a common theme in recent discussions with clients, and the yield curve implies a one in three probability of a recession in 2023. However, our economists believe that a recession is far from be unavoidable, in part due to the health of households and corporate balance sheets… We will monitor management’s comments for broader signs of a decline in consumer demand.”
- Inflation and profit margins. “Pricing power will become increasingly important in the face of continued inflation and cost pressures. To assess the sustainability of margins, we will monitor the ability of companies to pass on rising costs to consumers.”
- Business exposure to geopolitical risks and investment plans to improve resilience. “The pandemic shutdowns and Russian invasion of Ukraine have heightened the need for companies to assess their global exposures. Some companies have taken steps to build their supply chain resilience… companies that have recently ceased operations in Russia will likely need to take impairment charges to account for asset write-downs.”
Banks kick off earnings season this week. Find out what analysts expect.