Goldman’s Kostin Says US Results Season Better Than Feared

With the busiest week of the second-quarter earnings season over,
investors are relieved that results are holding up better than feared,
according to Goldman Sachs Group Inc. strategists.

Of the 56% of S&P 500 companies that have reported earnings so far,
more than half have beaten analyst estimates — above the long-term
average of 47%, strategists led by David J. Kostin wrote in a note
dated July 29. That, combined with “dovish messaging” from the Federal
Reserve, has provided a boost to equities, they said.

Still, at 52%, the rate of earnings beats is trailing the 62% average
pace set in the last five quarters, Kostin said, suggesting that
stocks are not out of the woods yet after posting their strongest
monthly rally since November 2020.

Although investors have been optimistic that corporate profits are
proving resilient to the impact of scorching inflation and glum
consumer sentiment, strategists are divided on the course for earnings
estimates through the second half of the year — and its impact on
equities — especially against the backdrop of a looming recession.

Morgan Stanley’s Michael J. Wilson said in a note on Monday that the
rebound in stocks is likely to be short-lived as estimates are cut
further and the economy heads into a contraction amid continued policy
tightening by the Fed. “We think the fourth quarter is the most likely
time of year when companies will decide to ‘kitchen sink’ the
estimates in order to preserve hope for a better 2023,” he said.

Bank of America Corp. flagged it might be “too early to celebrate” the
beats as only about 60% of earnings from the pressured
consumer-discretionary sector have been unveiled. “We’re still in the
very early innings of downturn and estimate cuts,” strategist Savita
Subramanian wrote in a note.

Their counterparts at JPMorgan Chase & Co. take a contrarian view.
Although they agree that earnings expectations are “finally” likely to
deteriorate in the second half, revenues are still expected to rise
meaningfully, and “any earnings weakness is unlikely to be material,”
strategists led by Mislav Matejka wrote in a note.

The Goldman team, meanwhile, expects volatility in equity markets to
remain well below the highs seen in the first half of the year.
There’s also a chance that recent historical volatility could fall
further, even in the event of a US recession, they said.

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