Goldman Sachs expects a weak third quarter earnings season this year from S&P 500 companies, which when combined with an equally weak Q4, will contribute to a 2% decline in the S&P 500 index by the end of 2016.
Chief U.S. Equity Strategist David Kostin wrote in a note to clients:
“Variables that determine earnings surprises – changes in U.S. economic growth, interest rates, oil price, the dollar, and EPS [earnings per share] revisions – suggest a below-average share of firms will report positive earnings per share surprises (43 percent vs. 46 percent). We see a weak third-quarter reporting season coupled with negative fourth-quarter EPS revisions pushing stocks 2 percent lower to our year-end target of 2,100.”
Kostin noted that bottom-up forecasts suggest an adjusted EPS decline of 1% from last year in the third quarter. He also adds that while most of Wall Street has reined in their Q3 estimates, that Q4 estimates for many firms will also need to be taken down a few notches.
Finally, Goldman predicts that defensive, yield-oriented stocks will pick up steam as the quarter progresses, while cyclicals will lag. The third quarter earnings season unofficially kicks off with Alcoa’s results before the bell tomorrow.
SPDR S&P 500 ETF Trust (NYSE:SPY) shares rose $1.57 (+0.73%) to $216.61 in Monday morning trading. Year-to-date, the largest ETF that tracks the benchmark S&P 500 index has gained 6.25%.