The Strategist

Analysts: Get ready for the worst in 3 years reporting season in US

07/03/2019 - 11:57

There are only two weeks before the start of the reporting season for the second quarter, and Wall Street is expected to reduce its total earnings per share by 1% year-on-year.

Bestpicko via flickr
Bestpicko via flickr
“If the predictions come true, this will be the first annual EPS decline since 2016,” said David Kostin, Goldman Sachs chief investment strategist in the United States.

Such news should not be a surprise for market participants. Already 113 of S&P 500 companies published earnings per share forecasts in the second quarter - 87 of them expect to see negative values, according to FactSet.

Nevertheless, Goldman Sachs notes that the average S&P 500 is set to increase earnings per share by 4% year on year in the second quarter.

"The cumulative earnings per share distorts the fundamental forecast for an average company," analysts say, adding that in the second quarter high-tech sector profits are expected to decline by 10% compared to the same period last year, which is mainly due to lower profits of Apple and semiconductor manufacturers.

High-tech firms have a significant impact on the overall dynamics of the S&P 500.

Goldman’s experts explain the decline in the growth of company profitability for several reasons.

First of all, a slowdown in economic growth has a significant effect. “Economic growth is the main driving force behind the growth in sales and profits of the S&P 500,” analysts say, noting that their own indicator of Goldman Sachs Current ActivityIndicator (CAI), which tracks economic growth, has slowed down since last year.

Another important reason is the cost of production against the backdrop of a strong labor market.

In addition, uncertainty about trade duties is expected to lead to a decrease in corporate profits. “Trade duties pose a greater risk to the company's profitability than sales,” Goldman Sachs experts say. “If a trade war escalates and duties of 25% are imposed on all imports from China, the current EPS consensus estimates for the S&P 500 can be reduced by as much as 6%."

However, the broader market is ignoring the expected decline in profits in the second quarter. On Monday, the S&P 500 opened at another record level. The reason was the so-called trade "cease-fire", which was reached between the United States and China over the weekend at the G20 summit in Japan.