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Earnings growth to continue, Goldman says, but US policy risks cloud outlook

Published 11/11/2024, 09:28
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Investing.com - Earnings growth will likely be a key future driver of US equities, although possible policy shifts during the upcoming Trump administration could impact the outlook for stocks, according to analysts at Goldman Sachs (NYSE:GS).

In a note to clients, the analysts led by David Kostin noted that quarterly profits from the 84% of companies in the benchmark S&P 500 that have already reported results rose by 8% versus the year-ago period, better than prior expectations for growth of 3%.

Crucially, artificial intelligence chip designer Nvidia (NASDAQ:NVDA) -- one of the index's largest constituents and a figurehead of booming enthusiasm around the nascent technology -- is still to post its returns on Nov. 20.

Expansion in per-share income has been fastest in the communication services and information technology, rising by 22% and 20%, respectively. However, this was offset by a 29% drop in the energy sector, reflecting a recent drop in crude oil prices.

"One way to characterize the [third-quarter] reporting season is 'back to normal,'" the Goldman Sachs analysts wrote. "The frequency of earnings beats normalized after several stellar quarters. 51% of S&P 500 companies beat consensus [third-quarter] forecasts by at least a standard deviation of analyst estimates, above the long-term historical average of 49% but below the 57% average from the most recent six quarters."

They added that consensus earnings per share estimate revisions have also returned to a more typical "modest downward" trajectory after remaining stable for much of 2024 -- thanks in part to sunny forecasts for the so-called Magnificent Seven megacap players.

Next (LON:NXT) year, S&P 500 earnings per share are now seen expanding by 11%. In 2026, the figure is tipped to climb by a further 7%, although the analysts said the estimates face both upside and downside risks from Trump's potential changes to tax and tariff policies.

On the campaign trail, Trump laid out a plan to slash domestic corporate tax rates to 15% from their current level of 21%. Each percentage point reduction could boost S&P 500 earnings by slightly less than 1%, the Goldman Sachs analysts predicted.

But Trump's proposed blanket levy of 10% to 20% on imports into the US, as well as heavy tariffs on China, could "reduce earnings via weaker consumer spenidng, retailatory tariffs on US exports, and increased uncertainty," the analysts flagged.

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