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Goldman: Quarterly EPS Growth Will Be Negative At Least Through 2020

A maddeningly slow rebound.

There’s good news and there’s bad news on the earnings front.

Actually, that’s not true. It’s mostly bad news. And that’s to be expected under the circumstances.

But, if you ask Goldman, S&P 500 profit “growth” in the second quarter won’t be nearly as dire as the bank initially expected. According to David Kostin, EPS growth for the period will be -70%, versus his previous estimate of -123%. One imagines this will be the only time in history when a 70% decline in quarterly profits represents a substantial upgrade to a previous forecast.

The rationale behind the relatively shallower Q2 profit drop is hardly surprising. Goldman attributes it to “the relative health of several major stocks accounting for 20% of EPS”.

In other words, it’s attributable to the resiliency of familiar names even in the face of a pandemic which, as documented in “The ‘Winner-Take-All’ Market And Our ‘Scroll Hypnosis’ Economy“, may have actually accelerated trends in favor of the market’s most beloved tech titans.

Deconstructing Q1 earnings doesn’t paint a particularly pretty picture.

For example, just over a third of companies managed to beat on the bottom line by more than one standard deviation. That is well off the long-term average of 46%. A fifth of reporting companies missed EPS estimates. The long-term average there is 14%.

Kostin writes that “although earnings actually grew on a year/year basis in 6 of the 11 sectors, the outsized declines in Financials (-41%) and Consumer Discretionary (-48%) weighed on the aggregate index”.

Looking ahead, Goldman’s latest projections are somewhat disconcerting as they represent yet another begrudging admission that the recovery will be frustratingly slow. Specifically, the bank has “adjusted” their baseline for the trajectory of quarterly EPS growth.

“We still expect that 2Q will represent the trough in EPS growth, driven in part by further reserve builds in Financials, but we lift our 2Q growth estimate from -123% to -70% yr/yr given the relative health of several major stocks accounting for 20% of EPS”, Kostin writes, before delivering the more sobering news. Goldman is cutting their third quarter EPS growth estimate to -30% from -21% and, more notable, their Q4 estimate to -17% from the previous projection of 27% growth.

That, Kostin notes, “reflect[s] a more gradual recovery with quarterly EPS remaining below 2019 levels for the full year”. The bank’s full-year EPS estimate for the S&P is unchanged at $110, representing a 33% decline.

Needless to say, there are those who believe profits will be below 2019 levels through year-end 2021, not just through the end of the current year.

When it comes to the economy, Goldman notes that “the divergence between quarter/quarter annualized and year/year real GDP growth has widened”. Below is a visualization.

The bottom line is that while the economic bounce will appear “V-shaped” sequentially, it is decidedly “U-shaped” on year.

And that latter point is what informs projections for a maddeningly slow rebound in profit growth.


5 comments on “Goldman: Quarterly EPS Growth Will Be Negative At Least Through 2020

  1. Only a cheap used car salesman on CNBC would trumpet sequential Q-on-Q % growth as a basis for a bull thesis right now.

    Funny how they use Y-on-Y comps when it suits their argument, then abandon that metric as soon as it doesn’t.

    • This isn’t entirely accurate. As I’m sure you’re aware, the standard way of reporting GDP in the US is QoQ annualized. Also, if you don’t have access to the originals, and haven’t been reading the notes firsthand, for yourself, every week, for years, how do you know they “abandon that metric as soon as it doesn’t” suit their argument? Can you back up that claim? I’ve been reading their research for nearly a decade, and my experience doesn’t support your assessment.

      • Walt, my intent wasn’t to be critical of all analysts and strategists. Only those who paint half a picture when making their cases. For example, two upcoming quarters of consecutive 10% Q-on-Q EPS growth is great, but just remind the viewers that those results follow a -8% quarter and a -30% quarter, so we’re not gonna be back to where we started, and therefore these rallies are all predicated upon massive multiple expansions, etc etc etc.

        I’m sure there are many good, thorough folks out there. But I’ve also seen a fair amount of metric cherry-picking from some of the usual suspects that regularly appear on CNBC. Would be nice if they painted the whole picture when outlining their arguments (…since the hosts and moderators don’t often push back or challenge).

        • If your point is that these are not normal numbers therefore the method of reporting should adapt with the times I am in full agreement. I like the second figure above with the graph showing absolute GDP.

  2. Anonymous

    I remember doing my 2007 SP500 estimates around this time and thinking $93 was a reasonable number. Fast forward 13 years, record low rates, a massive corp tax cut, massive deficits, a big individual tax cut and GS is talking $110.


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