The majority of S&P 500 companies have reported earnings by now, and in aggregate they’ve beaten estimates by even more than they usually do due to the ‘earnings management’ game they play with analysts.
Higher than expected earnings have forced Goldman Sachs to increase its 2010 S&P 500 forecasts, for the second time:
Goldman’s David Kostin:
For the second time in two months we are boosting our 2010 operating EPS estimate for the S&P 500. On May 28 we increased our estimate to $78 from $76. Now we increase our 2010 EPS estimate by $3 to $81 per share.
Nearly 90% of the equity cap of the S&P 500 has now reported 2Q results. Earnings have been extremely strong with 52% of firms beating consensus estimates by more than one standard deviation (vs. average of 41%) and just 7% missing estimates (vs. average of 14%). The average surprise was 13%, above the 4% historical average.
Profits have rebounded substantially…
We forecast 2010 EPS on an operating basis will be 43% above the 2009 level ($57). Our full-year 2010 estimate of provisions and writedowns for Financials remains $4 per share. Expected EPS growth on a pre-provision and pre-writedown basis equals 18% (from $72 to $85).
But might margin expansion be peaking?
Profit margins for the S&P 500 (excluding Financials and Utilities) reached 8.0% for the four quarters ended in 2Q 2010, fully 96% of its previous cycle high and 290 bp above the low of 5.9% reached in the recent downturn.
Nevertheless, as U.S. economic growth slows, from its historically high rate at the end of 2009 and the beginning of 2009, it’s important to note that Goldman is hiking their earnings forecasts despite forecasting a U.S. GDP slow-down at the same time. In fact, Goldman’s GDP forecast is less optimistic than consensus, for both 2010 and 2011. This is how a GDP slow-down can jive with corporate earnings remaining decent.
Finally, to add more nuance to the current environment, Goldman has actually pushed their 1,250 S&P 500 target back, from the end of 2010 to the middle of 2011. Corporate earnings have beaten expectations despite the U.S. economic slow-down, but the stock market remains mired by uncertainty.
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