(Bloomberg) — Don’t expect the upcoming earnings season to deliver too many positive surprises, said Goldman Sachs Group Inc.’s David Kostin.
The upward move in interest rates, the ongoing war in Ukraine and the omicron coronavirus variant have made the first quarter a particularly difficult one for companies, likely hampering sales in several sectors, the firm’s chief U.S. equity strategist said in a Wednesday interview with Bloomberg Television.
“There’s going to be a significant number of negative earnings surprises. In fact, you’ll probably get a large number of pre-announcements in the coming weeks, just before the earnings season,” Kostin said.
Positive profit surprises have provided a key support for stocks throughout the pandemic. But Kostin pointed out that earnings revisions have been negative for several industries over the last month, and he sees profit growth weakness most concentrated in sectors like consumer discretionary and consumer staples. First-quarter earnings estimates for both industries have declined throughout the year as inflation has picked up, according to Bloomberg Intelligence.
Weakening profit growth and rising interest rates don’t spell out big gains for stocks. The strategist expects the S&P 500 to finish 2022 at 4,700, which implies a less than 2% rise from Tuesday’s close. Kostin’s target is slightly lower than Wall Street’s average of 4,900. If the U.S. faces a recession, he says the equity benchmark could slide further to 3,600, though that’s not Goldman’s base-case scenario.
“The distribution of risks right now is more to the downside than the upside” given the combination of weaker profits and a U.S. 10-year Treasury that could end 2022 around 2.7%, he said. The rate is near 2.35%.
While Goldman Sachs economists don’t anticipate a recession, concern over a U.S. slowdown has driven investors to companies with stable prospects of earnings, particularly some of the largest technology stocks, Kostin said. The Nasdaq 100 has rallied 16% since hitting this year’s closing low on March 14.
Kostin also said that companies that have a lot of revenue exposure to Europe will be at risk this earnings season — compared with those that are primarily focused on U.S. sales — due to the fallout from Russia’s invasion of Ukraine. His comments echoed remarks from Lisa Shalett, chief investment officer of Morgan Stanley Wealth Management, in an interview with Bloomberg Television Wednesday.
For Kostin, companies that are buying back stock are likely to outperform, adding that dividend payers may provide investors some shelter as the economy decelerates.
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