Stocks could struggle to surpass Wall Street's high bar for second-quarter earnings, Goldman says

By Joseph Adinolfi

Growth names would be particularly vulnerable to a selloff if they don't live up to expectations

Wall Street has set a high bar for earnings growth as the biggest U.S. companies prepare to report results from the most recent quarter.

This could make it difficult for them to surpass expectations by a wide enough margin to make an impression, according to analysts at Goldman Sachs Group (GS).

"We expect the magnitude of EPS beats is likely to diminish as consensus forecasts set a higher bar than in previous quarters," said a team led by Goldman's Chief Equity Strategist David Kostin, in a Monday client note.

This could lead to a repeat of a dynamic that dogged stocks during the most recent corporate reporting season: companies that beat weren't rewarded as heavily for doing so, while companies that missed the mark were punished aggressively.

Furthermore, megacap technology companies like Nvidia Corp. (NVDA), Microsoft Corp. (MSFT), Meta Platforms Inc. (META) , Amazon.com Inc. (AMZN) and Apple Inc. (AAPL) could be poised for a reckoning as estimates suggest the pace of their sales growth likely slowed during the three months between the beginning of April and end of June, ahead of a slowdown in the pace of profit growth expected later this year.

"If consensus estimates are realized, the [second quarter] reporting season will be an important test of whether investors are willing to pay the same valuation premium for the group while the EPS growth differential between the mega-caps and the rest of the market is forecast to narrow significantly in 2H 2024 and 2025," the Goldman team said.

Goldman's analysis showed that growth stocks, a group that includes many of the megacap names listed above, have tended to be punished particularly harshly when they failed to live up to investors' expectations regarding sales growth.

Wall Street analysts are expecting S&P 500 companies to report earnings per share growth of 8.8% for the second quarter compared with the same period in 2023, according to FactSet data. If companies can manage this, it would mark the best quarterly earnings growth since the first quarter of 2022.

Taken together, S&P 500 firms have surpassed earnings expectations in practically every recent quarter.

During the first quarter, the largest U.S. companies saw their earnings grow by about 6%, according to FactSet estimates, handily surpassing expectations for 3.1% growth from the end of the first quarter.

Goldman's equity strategy team recently raised its year-end target for the S&P 500 to 5,600 amid a wave of upgrades from Wall Street analysts. The S&P 500 SPX was virtually unchanged at 5,459 on Monday, as was the Dow Jones Industrial Average DJIA at 39,120.

Meanwhile, the Nasdaq Composite COMP was up 52 points, or 0.3%, at 39,119.

-Joseph Adinolfi

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07-01-24 1154ET

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