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The Tell: Earnings expectations for 2023 likely to be revised lower, Goldman warns

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The second-quarter earnings season started in earnest on Thursday with disappointing reports from JPMorgan Chase & Co. and Morgan Stanley. On top of missing profit expectations, JPM also announced a temporary suspension of stock buybacks, as the bank looks to shore up its balance sheet should the U.S. economy slide into a recession in the coming months.

While expectations for second-quarter earnings growth remain relatively robust (according to FactSet, analysts expect earnings-per-share growth of 4.3% this quarter), Goldman Sachs’ David Kostin, the investment bank’s chief U.S. equity strategist, warned in a note to clients on Thursday that expectations for next year could be revised sharply lower, especially if a recession in the U.S. arrives more swiftly than Goldman Sachs expects.

While the impact on earnings would deviate dramatically from sector to sector, Kostin and his team projected that year-ahead earnings expectations for S&P 500 companies would likely contract by as much as 11%, compared with the 9% annualized growth currently penciled in by Goldman analysts. Consumer discretionary companies will likely see the biggest downward revision among the S&P 500’s 11 sectors.

Source: Goldman

Industrials and materials stocks would also likely see a large rejiggering of expectations, while utilities, healthcare and energy stocks are expected to be the most resilient, with EPS expectations contracting by just a percentage point, or two, as in the case of energy stocks.

Source: Goldman Sachs

While Goldman Sachs’ house view puts the odds of the U.S. economy entering a recession by year’s end at just 30%, the massive impact that a significant economic contraction might have on stocks bears further examination. According to Kostin, the S&P 500 could finish the year at 3,150 if this scenario materializes. That’s more than 1,000 points lower than Goldman’s current year-end forecast, which sees the S&P 500 finishing the year at around 4,300.

Some of Goldman’s rivals, including Bank of America
BAC,
-2.79%

and JPMorgan Chase & Co.
JPM,
-4.16%

and Deutsche Bank
DB,
-3.14%
,
all see higher odds of a recession arriving before year’s end.

If this scenario came to pass, it would constitute a 15.9% drop from the 3,749 level, which is where the S&P 500 was trading on Thursday afternoon. This view isn’t anything new, however: Kostin first published this warning more than a month ago, shortly before stocks tumbled to their lowest levels of the year.

Source: Goldman Sachs

U.S. stocks traded lower on Thursday, with the Dow Jones Industrial Average
DJIA,
-1.09%

off 600 points early in the session before recovering slightly into the afternoon. The blue-chip average was down 365 points, or 1.2%, at 30,413 in mid-afternoon trading. The S&P 500
SPX,
-0.95%

was down 39 points, or 1.1%, at 3,762. The Nasdaq Composite
COMP,
-0.62%

was down 31 points, or 0.8%, at 11,161.

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