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Bloomberg
Goldman Sachs strategists raised their profit estimates for S&P 500 after a record number of companies beat analyst expectations.
Strategists at the bank led by David Kostin lifted their 2020 EPS estimates to $130 from $115, expecting an overall 21% profit contraction versus last year’s levels. The second-quarter results also re-affirmed the team’s confidence in their 2021 EPS estimate of $170.
The index’s composition helps explain better-than-expected results, say strategists. A Q2 GDP contraction of 10% year-over-year should have amounted to a roughly 60% decline in EPS. However, the economic shock had an outsize impact on smaller firms, whereas large-cap firms were more insulated thanks to strong balance sheets and
elevated profit margins.
“The strength of technology broadly, and specifically market-leading FAAMG stocks, has also helped S&P 500 earnings fare better than what economic environment would normally indicate,†the Goldman team wrote.
With the earnings season winding down, more than 80% of companies beat on profits for the second quarter, the highest proportion since Bloomberg began tracking the data since 1993. All combined, their earnings exceeded estimates by about 22%. Strategists are in disagreement over what accounts for the upside surprise. Those at Citigroup Inc., for one, say the CARES Act created billions in pretax savings for companies by shifting labour costs to the government. Others say better-than-expected economic data helped sales come in firmer.