XLC - Goldman's top four themes for earnings season (yes one is AI)

2023-07-10 06:22:10 ET

Goldman Sachs says that there will likely be no growth on the top line this earnings season, but also that earnings revisions look to have bottomed.

"S&P 500 ( SP500 ) ( NYSEARCA: SPY ) ( IVV ) ( VOO ) revenues are expected to post no year/year growth for the first time in 10 quarters," equity strategist David Kostin wrote in a note. "US economic growth has remained strong since the start of 2Q and explains most of the sales growth in our top-down model."

"However, weaker commodity prices and falling inflation, which may limit firms’ pricing power, are incremental headwinds to S&P 500 sales growth," Kostin said.

"Bottom-up consensus S&P 500 EPS estimates for 2023 and 2024 steadily declined between the start of the year and 1Q earnings season by -4% and -3%, respectively," Kostin added. "These estimates have since stabilized and improved by 0.2 pp and 0.1 pp. S&P 500 FY2 EPS revision sentiment, which measures the relative shares of positive versus negative revisions, has also recovered from recessionary levels and is back to neutral territory."

Kostin and team identified four main themes to watch this earnings season:

1. Margins - "Firms can expand margins provided price inflation outpaces input cost inflation. We will monitor companies’ ability to push sales to drive profits."
2. Credit - "Our Regional Banks analyst Ryan Nash notes the challenging outlook for banks given shrinking deposits, rising deposit costs, and further noninterest bearing outflows. Many regional banks, such as M&T ( MTB ) and Fifth Third ( FITB ), have already lowered guidance but our analysts see the risk of further guidance cuts. Our Large Banks analyst Richard Ramsden notes that global systemically important banks) face three headwinds: funding costs, regulation, and credit, along with an FDIC special assessment that may be a 5% one-time hit to EPS."
3. AI - "Info Tech ( XLK ), Communication Services ( XLC ), and potential AI users can help investors understand the opportunities and risks related to AI ... Guidance and commentary from managements will help investors identify the enablers, hyperscalers, and long-term beneficiaries of AI. For example, Micron ( MU ) provided much better-than-feared revenue and earnings outlooks, while Nvidia ( NVDA ) guided 2Q sales way above consensus ($11 bil. vs. $7 bil.). 2023 EPS have been revised 1% higher for Info Tech and 4% higher for Communication Services since the start of 2Q."
4. Results "from the Consumer Discretionary ( XLY ) and Staples ( XLP ) sectors will provide a status update" on spending ... "Our Consumer Staples analysts forecast an end to the Food industry’s exceptional growth as inflation-led sales growth moderates. Recently, Campbell Soup ( CPB ) missed on sales and margins and General Mills ( GIS ) sales were pressured by reduced volumes, particularly in areas competing with private labels. 2023 EPS estimates for Consumer Staples have been cut by 1% since the start of 2Q. In contrast, Home Depot ( HD ) reiterated guidance and homebuilders Lennar ( LEN ) and KB Home ( KBH ) see continued demand strength heading into the summer. EPS estimates for Consumer Discretionary have been raised by 0.3% during 2Q."

More on the upcoming earnings season

• S&P 500 Earnings This Week: Financials Report Earnings
• Tesla Earnings Preview: Cash Flow Negative And An Elephant In The Room
• Eyeing A Tech-Led Dip As Q3 Is Off To A Soft Start

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