3 Reasons Corporate Profits Are Healthier Than They Look

This article was originally published on this site

Despite the handwringing on Wall Street regarding decelerating corporate profits, Goldman Sachs says that earnings are healthier than they look — and may even turn around in the second half of the year. “Investors have expressed concern about the likelihood of an ‘earnings recession’ in 2019,” says Goldman. “There are three reasons we are less concerned than many investors about the potential for an earnings recession.”

What It Means For Investors

First, Goldman expects weak profit growth to be short-lived, and should improve in the fourth quarter of 2019. Second, earnings revisions, which drive stock prices, have bottomed and the market already has priced in the earnings slowdown. Third, Goldman views consensus estimates for 4% earnings growth this year as partially concealing underlying strength in S&P 500 sales, pre-tax earnings, and also median earnings. Goldman forecasts 7% earnings growth for the median S&P 500 company and a 5% increase in revenue in 2019. The firm presented its argument in its latest US Weekly Kickstart Report.

3 Reasons For Optimism On Earnings

·     Earnings seen rebounding in second half

·     Earnings revisions have bottomed

·     Consensus estimates overlook strength in sales, pre-tax earnings

Source: Goldman Sachs 

Goldman’s View

Many investors are skeptical of forecasts that earnings will jump 9% in this year’s fourth quarter after rising by only 1% in the first three quarters. But Goldman says that key forces will support this late-year spike in profits. “Our model suggests the expected path of US GDP growth, oil prices, and the trade-weighted US dollar will support a rebound in EPS growth in 4Q 2019,” says Goldman 

The firm also says that a stronger-than-expected fourth quarter earnings season puts Corporate America on a stronger footing for profit growth in 2019. For starters, fourth quarter results surpassed low expectations and provided support for the 18% rebound in U.S. equity prices since December following a 20% plunge. In addition, the median company that beat expectations outperformed the S&P 500 the day after reporting by the most since 2009. S&P 500 earnings grew by 14% in in the fourth quarter and by 22% for the year, the strongest growth since 2010, noted Goldman.

Looking Ahead

Goldman’s positive view has a number of caveats for 2019. It says rising wages, lower margins and broader macro trends could end up shaving earning growth to just 3%, which essentially is firm’s bear case. But Goldman’s generally optimistic view runs counter to other market watchers, including bears at Morgan Stanley who are forecasting an earnings recession, illustrating the intense debate on Wall Street about the direction of the stock market. Given that earnings are a major driver of stock prices, investors’ ability to decide which view is right may determine how much they profit during the late stage of the bull market.

Source: Investopedia

Powered by WPeMatico