Markets stocks

Goldman: In Downside, S&P 500 Profits Won’t Recover From Pandemic Until 2023

Don't worry, the base case still looks like a "V".

In a downside scenario, where the recovery from the virus collapse looks like a “check mark” as opposed to a “V”, S&P 500 earnings won’t return to 2019 levels until at least 2023, according to Goldman.

“We envision this scenario occurring if reopening plans are meaningfully pushed back because the virus is uncontained or if damage to the labor market and businesses becomes more long-lasting in nature”, the bank’s David Kostin writes, in a noted dated Friday.

He cites rising large company bankruptcies as an example of the kind of long-lasting, structural damage some worry the US economy is destined to suffer, all efforts by the Fed and Congress to make everyone whole notwithstanding.

Looking solely at filings for firms with liabilities of at least $50 million, the second quarter of 2020 was the second-most harrowing stretch on record. There were 75 filings among such companies, matching Q2 2009. In July, Brooks Brothers and Sur La Table became the latest high-profile casualties.

In Goldman’s downside case, S&P EPS would be $105 in 2020, $135 in 2021, and $160 in 2022, meaning full-year earnings two years from now would remain 3% below 2019 levels.

The good news is, that is not the bank’s base case. Rather, the baseline scenario calls for full-year earnings of $115 this year (an upward revision, but still down -30%), $170 in 2021 (unchanged from Kostin’s previous forecast), and $188 in 2022 (Goldman introduced the 2022 forecast this week).

Of course, some will say that if projecting earnings two years ahead is always implausible, it’s an exercise in abject futility in the current circumstances. But, the show must go on. The estimates must be delivered. Here are the assumptions that go into the bank’s top-down model:

Our 2021 EPS forecast is 4% above realized 2019 EPS. Our top-down earnings model incorporates a variety of macro variables. In 2020, we assume average annual US GDP growth of -4.6%, average Brent crude oil price of $41/bbl (-35% year/year), and a 5% stronger trade-weighted US dollar relative to 2019. Our 2021 and 2022 forecasts incorporate expectations of modestly higher oil prices, a weaker USD, and US real economic growth that averages +5.8% in 2021 and +3.5% in 2022. Our economists also expect slack to persist in the labor market through 2022, providing additional flexibility for corporate profit margins.

Kostin does reiterate that the election adds considerable uncertainty on top of the indeterminacy created by the virus.

The odds of a Democratic sweep have ” increased substantially”, he notes, on the way to reminding you that Goldman’s 2021 profit forecasts would fall by $20 in the event Biden’s tax plan were enacted.

For what it’s worth, JPMorgan believes the mechanical effects of the tax hike would be partially offset by a reduction in trade tensions and a boost from infrastructure spending.

Goldman alludes to that. “Outside of tax reform, regulation, infrastructure, and trade policy represent potential upside and downside risk to S&P 500 EPS”, the bank says, adding that a “large fiscal expansion would likely provide a tailwind to economic growth and EPS”.

Read more: Maybe Biden Wouldn’t Be So Bad: Markets Begin To Ponder Trump Exit

As far as the near-term outlook for corporate profits goes, Goldman’s estimates remain below bottom-up consensus.

Specifically, the bank sees a 60% decline in Q2, 30% in Q3, and 17% in Q4.

Last week, the bank trimmed its outlook for the economy based on new lockdown measures and the reinstatement of containment protocols across states representing more than half of the US population.

Needless to say, trends on that front have not been favorable over the past several days, with hotspot states reporting record deaths and hospitalizations, while the total case count continues to rise inexorably.

Commenting on Q2 reporting season (which kicks off in earnest next week), Goldman’s Kostin writes that “investors will be looking below the surface of aggregate results to better understand the earnings impact of shutdowns and how quickly earnings can recover as the world reopens”.

“Given the recent resurgence of COVID-19 cases in the US, we expect management commentary will prove more important to gauging the forward path of earnings than actual 2Q results”, he adds.

Read more: Goldman Says US Recovery To ‘Stall’ Amid ‘Dramatic’ Virus Surge

5 comments on “Goldman: In Downside, S&P 500 Profits Won’t Recover From Pandemic Until 2023

  1. looking at cyclicality, trending, and mean reversion of human economic and social activity, (what the Main Street and goods producing/consuming economy is), even Goldman,s recovery numbers are too fast. Taking the reaction to run-of -the-mill major SHOCKS like the Brexit vote, the Trump election, etc., it takes at least several thrusts over many months more likely 13 to 17 months to reach full absorbtion of the impulse Taking the Spanish Flu cycles as COV-19 was one of the biggest shocks of the past 100 years and matches well, the high in infection is in Oct-Nove this year and in March to June, there should be a weaker infection peak. THEN WE CAN TALK ABOUT positive Growth..

    • Why do you think the increase in cases, hospitalizations and deaths in Florida, Texas, Arizona and California has not roiled markets? If a month ago, you knew what we know now for these 4 states, one might not have thought that NDX would be making new highs day after day?

  2. Anonymous

    Sorry but the base case is a dream. Ain’t gonna happen. People will be surprised at top line issues combined with margin/productivity issues. Job losses will be large for years.

    This is another step function is the hollowing out of the middle and upper middle class.

    Yes, it is going to be disconcerting.

  3. Anonymous

    Vlad, I suspect computers and many feeling the fast rebound off lows will be repeated if (or when) more Covid bad news happens combined with TINA and FOMO. Also, lack of selling as many were cautious and not very long. Much safer to hide in FAANG plus MTN etc. if you have to have exposure you won’t lose your job there while you will buying value. Great companies but feels so Nifty 50, late 99/early 00. Longer term returns off these levels look challenging to me.

    Kind of a joke to crowd into overowned expensive stuff but that is the money mgmt way.

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