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Goldman Sachs might have provided an early preview of market reaction to the first quarter earnings season, which in turn could be a warning to investors looking for outsize profit growth to offset the renewed risks tied to the U.S. war with Iran.
The Wall Street titan on Monday posted a massive surge in first quarter profits, thanks in part to record stock trading revenue and a near doubling in investment banking fees, and solid gains from its asset management division.
But its bottom line growth rate of 19%, in terms of overall profits, dwarfed the 6.5% rate at which Goldman topped Wall Street’s headline earnings estimate, suggesting investors had already priced a large amount of the bank’s performance into its stock price heading into Monday’s update.
Shares in the group, in fact, were last marked 3.5% lower in early Monday trading, dragging both the Dow Jones Industrial Average and the S&P 500 lower along the way.
Deutsche Bank strategists, led by Binky Chanda, think this could be a theme that repeats itself throughout the whole of the first quarter reporting season.
Across Wall Street, analysts are looking for headline earnings growth of around 14%, a rate that would take collective S&P 500 profits to just over $605 billion. That’s a $7 billion improvement from early forecasts. An even firmer advance of 20% is expected over the three months ending in June.
But those impressive figures are likely already reflected in the benchmark’s resilience, and the fact that despite a worrying surge in global oil prices, hawkish signals from the Federal Reserve and fading GDP estimates, the S&P 500 ended last week with a year to date decline of just 0.6%.
“Despite continued strong earnings growth the S&P 500 is at the same level as it was in late October, reflecting the near-perfect rotation out of megacap growth (MCG) and tech companies and into most other sectors,” Chanda and his team said in a note published Friday.
“But the rotation in our reading is now done,” they added. “Positioning in equities is starkly disconnected from earnings growth, in line with animminent drop, especially for MCG and tech and financials.”
Deutsche sees the S&P 500 hitting a near-term ceiling of around 6900 points if the U.S.-Iran war de-escalates, then expects a shift in investor sentiment toward pre-conflict risks tied to the disruption from artificial intelligence, losses stemming from private credit markets, and a slowing U.S. economy.
Morgan Stanley’s chief U.S. equity strategist, Mike Wilson, sees a similar “discounting process” in stocks, going back as far as last October, but argues it reflects a more positive outlook.
“Equity markets trade in the future where information is imperfect and uncertain,” he said in a note published Monday. “Just like they discounted much of the uncertainty we are now seeing in the headlines, they are now looking ahead to resolution of that uncertainty and bettervisibility on the rolling recovery that began a year ago.
He cites both the market’s March pullback, which peaked at 9.1%, and the resulting decline in forward earnings multiples, which reached 18%, as evidence.
“Earnings growth is moving in the right direction, which explains why the price damage has been contained,” he said. “That combination—falling multiples with improving earnings growth—is a classic bull market correction, not a bear market.”
Christopher Harvey, head of equity and portfolio strategy at CIBC, also sees a high bar for the markets to clear over the first quarter earnings season, but thinks CEO commentary will play a decisive role in determining investor reaction.
“We are worried that beats without positive guidance will be tough toreward,” he said. “Moreover, the macro uncertainty likely creates a more cautious tone from the C-suite or some hesitancy in upping guidance especially for cyclical firms.”
22V’s Dennis DeBusschere, however, sees opportunity in splitting the difference between a pessimistic reading of the current market and one that suggests stronger gains ahead.
He and his team note that the S&P 500 has been moving largely in concert with broader macro and geopolitical themes, with reduced volatility for individual stocks as a result.
That sets up what the team calls an “unusual opportunity for significant ‘idiosyncratic’ or thematic divergences through the earnings season.” Options pricing for downside risk is notably cheaper, DeBusschere said, and recession risks are minimal.
“Yes, the energy shock is expected to slow growth over the coming quarters, and investors have pushed their expectations for the first Fed rate cut out to mid-’27,” he and his team said in a Monday note. “But at the same time, the U.S. consumer is well positioned to absorb the real income hit from higher gas/energy prices, and AI capex trends show no signs of slowing down.”
Write to Martin Baccardax at martin.baccardax@barrons.com