Goldman Sachs: The stock market’s biggest driver will plunge 123% in a brutal 2nd quarter

Wall Street stands empty as people stay away from the area due to the coronavirus on March 24, 2020 in New York City. Spencer Platt/Getty Images
  • Profit growth for S&P 500 companies is set to slip 33% in 2020 as the coronavirus lockdown halts revenue streams, Goldman Sachs said.
  • Earnings-per-share growth is historically stocks’ biggest upward driver, and the metric will slide by 123% in the second quarter amid the strictest nationwide containment efforts.
  • Declines across the energy, consumer discretionary, and industrial sectors will weigh on the broad index, while tech, healthcare, and utilities companies are the best positioned amid the economic turmoil, the team wrote in a note to clients.
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Corporate profit growth – historically the biggest booster for stock prices – will experience three consecutive quarters of heavy contraction as the coronavirus outbreak strangles revenues, according to Goldman Sachs.

The investment bank expects S&P 500 earnings-per-share expansion to slide by 33% in 2020, with poorly performing energy, consumer discretionary, and industrial firms’ underperformance weighing on the broad index. Profit margins that stood near record highs at the start of the year will fall to 8.7%, the team of analysts said, their lowest level since 2010.

The biggest hit to earnings will arrive in the second quarter, when mass unemployment, business closures, and quarantine activity plunge demand to an unprecedented low. The three-month period is expected to bring a 123% decline to earnings growth before sliding another 21% in the third quarter, the team led by Ryan Hammond wrote in a note to clients.

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The consumer staples, healthcare, and utilities sectors offer investors a safe haven from more cyclical corners of the market, according to the bank. The tech industry will also weather most of the economic storm, “given the high share of recurring revenues for some of the largest stocks,” the analysts said.

Before profit growth can rebound, the tanking economy needs to stabilise. Goldman revised its quarterly GDP estimates lower on Tuesday, calling for the US economy to shrink by 34% in the second quarter in a virus-induced trough. Recovery won’t arrive until the third quarter with a 19% gain in GDP, the bank said.

Earnings growth will post a similar reversal in the fourth quarter and jump 27% through the period, according to the analysts. Next year will extend the rebound, as the bank sees 2021 S&P 500 earnings per share jumping 55%. Such forward estimates are still “unusually challenging,” Goldman said, “given the unprecedented disruption to society caused by COVID-19.”

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