Bank strategists at Goldman Sachs and Morgan Stanley have issued warnings about risks in upcoming earnings.
Macroeconomic factors such as decreasing demand and rising expenses are expected to make this year’s reporting season challenging for companies, according to strategists at Goldman Sachs Group Inc. and Morgan Stanley.
One of Wall Street’s most ardent bears, Michael Wilson, and his colleagues at Morgan Stanley said in a note that “things like inventory, personnel costs, and other latent charges are wreaking havoc on cash flow.”
With certain bellwether stocks posting both top-line and bottom-line misses in recent weeks, the market has begun to show signs of weakness.
According to a second note from Goldman strategists, the three main risks to upcoming earnings reports are a strengthening US dollar, headwinds to margins, and tax reforms.
As strategists led by David Kostin stated, fewer sales beats have historically been associated with a stronger dollar. They cited Levi Strauss & Co., which missed projections last week in part because of the rising currency.
The success of firms with 100% domestic sales would be supported by the dollar’s continued strength in comparison to stocks with a higher percentage of overseas sales.
In 2022, a Goldman basket of stocks with 100% domestic revenue growth has outperformed one with 71% international revenue growth.
Nevertheless, as the Federal Reserve maintains its hawkish attitude, all businesses are dealing with a number of challenges this year, including increased inventories, higher rates, and declining demand.
The majority of investors, according to Bloomberg’s most recent MLIV Pulse survey, anticipate that the S&P 500 Index will decline during reporting season as references to both inflation and recession predominate earnings calls.
If the macro climate worsens, “an inventory surplus will pressure on margins,” the Goldman strategists concluded.
In addition, they claimed that the Inflation Reduction Act, which will commence in 2023 and levy a 15% minimum tax on corporate book income and a 1% excise tax on buybacks, will have a negative impact on S&P 500 earnings.
In comparison to the first half of this year, the Goldman team anticipates fewer good surprises in the third quarter, along with downward revisions to the forecasts for the fourth quarter and 2023.
