It’s that time in the quarter again: 3Q earnings season begins this week with Wall Street consensus expecting S&P 500 EPS growth of just 5% (3% ex-Energy), a sharp drop from the last two quarters (Q1 was+14% and Q2 +11%). According to Goldman’s Davis Kostin, “solid economic activity coupled with a weak USD will support sales growth of 7%, consistent with the past two quarters.” The Goldman strategist also expects margins to slip slightly to 9.7% but remain near record highs, and that “investors will ignore the EPS slowdown given one-time hurricane effects and the focus on benefits from corporate tax reform.”
Before we summarize the three main issues Goldman’s clients are most focused on, here is a quick backdrop of the bank’s overall outlook on the market:
S&P 500 notched another all-time high this week. Optimism for tax reform has pushed stock prices up despite bond yields rising to 2.4%. Our political economist assigns a 65% likelihood that tax legislation will be passed in 2018, which is consistent with market pricing. In late August, the S&P 500 traded at 2450, 17.6x our 2018 EPS estimate of $139. Details of tax reform are uncertain, but we estimate that EPS could rise to $148 depending on the final legislation. Applying a constant P/E multiple to the higher EPS would suggest an index level of 2610. The current S&P 500 level of 2550 implies a roughly 60% probability of corporate tax reform.
Incidentally, Goldman still expects the S&P 500 to end 2017 at 2400, 2018 at 2500 and 2019 at 2600, which means that the US stock market is just shy of Goldman’s 2019 price target.
This post was published at Zero Hedge on Oct 8, 2017.
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