U.S. profit margin estimates overly optimistic, Goldman says

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U.S. profit margin estimates are overly optimistic, exposing stocks to further downside risk as Wall Street analysts revise their expectations, according to strategists at Goldman Sachs Group Inc.

“While rotations within the stock market have signaled expectations of slowing growth, the index valuation does not appear to provide a buffer for the uncertainty surrounding the trajectory of future earnings,” wrote the strategists led by Ben Snider in a memo dated June 27. Profit margins as the median S&P 500 company will likely shrink next year whether or not the economy falls into a recession, strategists said.

US stocks are in a bear market, with the S&P 500 heading for its worst first half since Richard Nixon’s presidency as fears of a possible global recession hammered risk appetite. But analysts remained bullish on corporate earnings expectations, with net margin estimates for S&P 500 companies remaining at an all-time high.

HSBC Plc’s Max Kettner also said in a note that stock markets still underestimated the impact of a possible recession, while earnings and growth expectations were likely to be revised down. Morgan Stanley’s Lisa Shalett said Monday that analysts needed a reality check on their earnings projections for this quarter.

“Economists have started to cut their top-down economic forecasts for GDP, and yet corporate fundamental analysts are sitting there like deer in the headlights, not knowing what to do with the numbers,” Morgan Stanley’s chief investment officer said. Wealth Management on Bloomberg TV.

Goldman strategists expect overall S&P 500 net profit margins to remain stable in 2023, even if the economy does not contract. The risk is lower for the 10 largest companies in the S&P 500, they said, which account for 19% of the index’s earnings. The energy sector will also be a tailwind for aggregate index margins, benefiting from rising commodity prices.

“We continue to recommend that investors focus on stocks where they can be relatively confident about the future trajectory of earnings, including stable growth companies and the health care sector, which has increased earnings in each of recent recessions,” the team said.

Reporting by Sagarika Jaisinghani for Bloomberg News.

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