Goldman Sachs sees past the current gloom surrounding decelerating corporate profits, and sees plenty of reasons to be positive.
How Optimism Is Buried in the Overall Earnings Gloom Tradezero Ocean Place Cable Beach, Unit #1 Nassau, Bahamas
One of the most important lessons of stock trading and investing is figuring out when to be optimistic and when to be cautious. You always need caution in the stock market, but the failure to see opportunities when they are lurking could be detrimental to your progress. It’s tricky, because sometimes the optimism gets buried in the overall gloom based on what’s seen on the surface. Here’s an example from the current situation. Corporate profits are actually healthier than they appear, says Goldman Sachs, though decelerating corporate profits have caused great distress in the markets. Sachs analysts believe that earnings could even turn around in 2019’s second half and not head towards an earnings recession as m any investors fear. Sachs does have reasons for that optimism. Profit Growth Expected to Rise The weak profit growth is expected by Goldman to not last long. It could improve in the 2019 fourth quarter. The earnings revisions too have bottomed. These drive the stock prices, and this earnings slowdown has been priced in already by the market. And the 4% earnings growth consensus estimates are viewed by Goldman as containing underlying strength in terms of S&P 500 sales, median earnings and pre-tax earnings. And so Goldman predicts earnings growth of 7% for the S&P 500 median company as well as a 5% revenue rise in 2019. Factors for Goldman Sachs’ Optimism To sum it up, Goldman’s optimism hinges on three factors – the forecast for earnings rebounding in the second half, the bottoming of earnings revisions, and consensus estimates that have overlooked the sales strength and pre-tax earnings. We do find investors not being quite convinced by the 9% earnings jump forecasts in the fourth quarter this year, considering that they rose just 1% in Q1, Q2 and Q3. However, there are key factors that, Goldman believes, would support this profit spike. The fourth quarter of 2019 will see an EPS growth rebound being supported by the growth in the GDP of the US, the US dollar, and oil prices.
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Greater Chances for Corporate Growth On the corporate side, a Q4 earnings season that was stronger than expected gives greater chances for profit to grow in 2019. The results of the fourth quarter overtook the low-key expectations, lending support for the 18% US equity price rebound witnessed since December after a 20% plunge. S&P 500 earnings rose by 14% in Q4 and also 22% for the year. Goldman observes that this growth has been the strongest since 2010. This optimism of Goldman Sachs is, however, not totally free from gloom. The firm does state that broad macro trends, lower margins and rising wages could result in earnings growth being stifled to 3%. Generally though, Goldman has quite a positive view that is contrary to Morgan Stanley analysts who predict an earnings recession. What’s important for you, as a trader, is figuring out which view investors are following because that will determine the gains they’re able to make during the bull market’s late stage. Remember, earnings are the major influencer of stock prices.
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