Goldman Slashes Outlook For S&P Profits. Sees No Growth

For the first time since the pandemic, corporate margins contracted in the US.

Net margins fell by more than 40bps YoY in Q3, as labor costs continued to rise (albeit at a slightly slower rate depending on your preferred gauge), while both goods and services inflation were extremely elevated throughout the quarter.

The 43bps worth of contraction was actually better than expected, but the figure is flattered by energy. Excluding energy, S&P 500 net margins contracted 137bps, according to Goldman, worse than consensus.

The bank sees ex-energy margins contracting a further 50bps in 2023 following 86bps worth of contraction this year. Goldman expects less than 30bps of margin expansion in 2024 (figure above), leaving the bank’s top-down projection for that year some 100bps below consensus bottom-up.

You’ll note that if the bank is correct, margins (again, excluding energy) will be back to pre-pandemic levels by the end of next year.

Between 2019 and last year, margins expanded by a stupendous 140bps, thanks largely to the lowest SG&A (ex-R&D) costs in at least a quarter century (figure below).

Goldman doubts that’s sustainable. “Given the challenging demand backdrop, and elevated wage inflation, we expect SG&A as a share of sales will begin to revert towards the long-term average and weigh on margins in 2023,” the bank’s David Kostin said.

Goldman’s revenue forecasts are broadly unchanged, and although Kostin does expect slower inflation, supply chain normalization and fading labor market distortions next year, he was nevertheless emphatic: “Margins have inflected downwards.”

The bank now expects no earnings growth in 2023. Index-level profits will be $224 next year, the same as 2022. Profits should expand by 5% in 2024, according to Kostin, who noted that “since the start of Q3, analysts have lowered aggregate S&P 500 EPS by 7%,” more than double the historical rate of forecast cuts for the comparable period (figure below).

Remember those 2023 revision cuts that skeptics insisted were coming, but that stubbornly refused to manifest? Well, as Carol Anne would say, “They’re heeeere.”

Goldman expects more. “In coming months, we expect additional negative EPS revisions due to overly optimistic margin outlooks,” Kostin wrote.

Conensus bottom-up still expects earnings to grow 4% next year, to $233, on flat-ish margins. In Goldman’s recession scenario, that figure would need to come down by $33.