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Goldman Warns On S&P Earnings Downside From Deteriorating Macro Outlook

The coming "litmus test".

We suspect there are more “Apples” looming out there as we enter 4Q earnings season; but it’s difficult to ascertain exactly where those risks are the greatest.

In case you missed it, that’s a quote from the latest note penned by Morgan Stanley’s Mike Wilson, the man who “called” the Tech/Growth selloff last year and whose only “mistake” was not being bearish enough with his year-end S&P target which, you’re reminded, was well below consensus.

After riding the Tech selloff call (and, more generally, his “rolling bear market” thesis) to multiple TV cameos (incidentally, his 15 minutes is still alive – he showed up on BBG TV Friday morning) Wilson proceeded to pound the table in November on the distinct possibility that Q4 earnings season will bring guide downs and cautious commentary from management.

Although Mike was generally chastised as a “bear” for his relatively dour assessment (and indeed, he’s a self-professed Chicago Bears “fanatic”), his take on the outlook for corporate profits in the new year was less “pessimist” and more “realist.” After all, you needn’t be Albert Edwards to posit that the combination of rising wages, higher interest rates and tariff-related price pressures are likely to crimp margins and when you throw in the waning fiscal impulse and the psychological overhang from the seemingly intractable trade conflict, you come away thinking that even if Q4 earnings season somehow manages to go swimmingly, the outlook after that is cloudy at best and stormy at worst.

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Well, needless to say, the cracks are starting to show. A lot of what Wilson warned about started to play out in November and ultimately manifested itself in GM’s decision to slash jobs and close plants, guidance cuts from FedEx and Apple, warnings from Micron, a “shock” miss from Samsung, and on Thursday, a guide down from Macy’s.

Amusingly, GM flipped the proverbial script on everyone on Friday, forecasting 2019 adjusted EPS of $6.50-$7.00, well above estimates, in what was either a highly encouraging sign or else an absurdly optimistic guide that’s destined to be remembered as an epic misstep if it doesn’t pan out. The shares had their third-best day in six years.


Suffice to say that’s likely to be more “exception” than “rule” going forward.

That’s the context for Goldman’s latest “weekly kickstart” note that finds the bank “assessing downside risk” to their 2019 EPS forecast. The bank reminds you that their “baseline estimate is for 6% S&P 500 EPS growth (to $173)” and the problem with that in the current environment is that their top-down model “is most sensitive to changes in US economic activity.” In case you haven’t noticed, there are a lot of questions about the health of the U.S. economy right now, and Goldman’s forecasts assume “average annual real US GDP growth of 2.6% [and] real World GDP growth of 3.8%.

You might recall that late last month, the bank’s Jan Hatzius slashed his target for U.S. growth in 2019 and also cut his forecast for Fed hikes (and that latter decision was begrudging, to be sure). Additionally, you should note that Goldman was already cautious on EPS growth for 2019, much to the chagrin of Kevin Hassett.

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In light of ongoing economic concerns, Goldman notes that “recent weakness in the macro landscape could drive up to $5 of potential downside to our 2019 EPS estimate.” The bank’s current forecasts for U.S. and global growth would already imply a $2 haircut. They also flag lower oil prices as a risk, although the ridiculous ~22% rally in crude off the December nadir might alleviate some of those concerns.

After offering some obligatory soothing words (e.g., earnings recession unlikely, negative revisions not unusual, etc.), Goldman delivers the goods. Here’s the main takeaway and accompanying visual:

Equity prices have tracked negative earnings revisions, but earnings season will represent an important litmus test for the near-term path of the S&P 500. FY2 EPS revisions sentiment, defined as the number of positive EPS revisions less the number of negative EPS as a share of total revisions, has slipped into negative territory. The path of S&P 500 returns has generally tracked this revision sentiment. Earnings revisions briefly stabilized at the end of 2018, but AAPL’s guidance set in motion further negative revisions, with sentiment declining from –14% to –23% in the past week. With no nascent signs of slowing negative revisions, the strength of 4Q results and management commentary around the outlook for 2019 will take on heightened importance for whether earnings estimates (and returns) stabilize in the near term.


We’re not sure there’s much to add to that, although we would again suggest that we are right on the brink of slipping into a self-feeding loop wherein souring sentiment ends up escaping the confines of market participants’ and management teams’ imaginations and manifesting itself in real-world outcomes.

The shutdown isn’t helping and neither is Trump’s trade war.



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