Three things Goldman Sachs wants to hear on earnings calls

Earnings risks are to the downside for the rest of the year and management commentary will be particularly important this earnings season given current uncertainty, Goldman Sachs says.

Excluding the outlier sectors of Energy (XLE) outperformance and Financials (XLF) underperformance, Goldman predicts a modest 6% rise in Q1 S&P 500 (SP500) (NYSEARCA:SPY) earnings.

“Full-year EPS estimates have actually been revised 2% higher since the start of the year and earnings growth is forecast to accelerate in coming quarters,” strategist David Kostin and team wrote in a note. “Analysts appear reluctant to adequately trim forecasts despite the high degree of uncertainty surrounding the economic outlook.”

“Although our 2022 topdown EPS estimate is 3% below bottom-up consensus ($221 vs. $227), we believe results from 1Q earnings season are unlikely to generate enough clarity for analyst estimates to fully converge to our forecast.”

“We encourage managements on their conference calls to address three key sources of investor uncertainty that will affect earnings during the rest of 2022,” Kostin said.

They are:’

1. Outlook for economic growth and consumer demand. “The possibility of a recession has been a common theme in recent client discussions, and the yield curve is implying a one in three probability of a recession in 2023. However, our economists believe a recession is far from inevitable due partly to healthy household and corporate balance sheets … We will monitor management commentary for broader signs of declining consumer demand.”
2. Inflation and profit margins. “Pricing power will become increasingly important in the face of continued inflation and cost pressures. In order to assess the sustainability of margins, we will monitor the ability of firms to pass increased costs through to consumers.”
3. Business exposure to geopolitical risks and investment plans to improve resiliency. “Pandemic lockdowns and the Russian invasion of Ukraine have reinforced the need for firms to evaluate their global exposures. Some firms have taken actions to strengthen their supply chain resilience … Furthermore, firms that have recently halted business in Russia will likely need to take impairment charges to account for asset write downs.”

Banks kick off earnings season this week. See what analysts expect.