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”.
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.