- US banking giant Goldman Sachs says it expects
S&P 500 earnings per share to drop 60% in the second quarter, the biggest decline since 2009 during the financial crisis. - "If realized, 2Q 2020
EPS growth would be the weakest since 4Q 2009," the analysts said, noting that EPS fell 65% in that quarter. - For the full year of 2020,
Goldman Sachs said it expects S&P 500 EPS to be 30% lower at $115 compared to 2019. - The bank added that a Democratic victory in
US elections , and the implementation of an ambitious tax plan byJoe Biden could push EPS down by $20 in 2021. - A number of US banks are reporting
earnings results this week, including JPMorgan, Wells Fargo, Bank of America, and Goldman itself.
As the Q2 earnings season kicks off this week, Goldman Sachs is bracing for S&P 500 earnings per share to plummet by 60%, which if realized would be the sharpest contraction since 2009, during the heart of the financial crisis.
Goldman, Wells Fargo, JPMorgan, and Bank of America are among the big US banks to report second quarter earnings this week.
In a note published on Friday, July 10 analysts led by David Kostin, said they expect earnings per share to plunge almost two-thirds in the second quarter compared to the same period in 2019.
"2Q earnings season kicks off in earnest next week, with the large US Banks reporting results. Consensus forecasts S&P 500 EPS will decline by 44% year/year in 2Q, but we believe earnings will fall by 60% in the quarter."
"If realized, 2Q 2020 EPS growth would be the weakest since 4Q 2009," the analysts said, noting that EPS fell 65% in that quarter.
For the whole of 2020, its baseline scenario for the S&P 500's average EPS is a fall of 30% compared to 2019. EPS for 2020 will average at $115, Kostin and his team said.
However, the bank maintained its previous EPS forecast for full year 2021 at $170, up 48% from 2020. For the year 2022, the US banking giant says EPS will continue to rise, hitting $188, a gain of 11%.
These are the bank's baseline scenarios, but in a downside scenario, the analysts said, EPS in 2020 could be as low as $105, 2021 could see EPS of $135, and in 2022 it could be just $160, 14% below the baseline.
Goldman Sachs' 2020 outlook is based on predictions that US GDP will shrink by 4.6% in the year, and
Brent is currently trading at around $42.50 per barrel, so would only need to fall a small amount to meet that target.
The oil sector has been extremely volatile since March, when Saudi Arabia kicked off a price war with Russia. The turbulence was made worse by the coronavirus pandemic, which torpedoed demand, and even caused US oil prices to briefly turn negative in April amid a huge oil surplus and lack of storage space.
If Joe Biden wins in November, his ambitious tax plan could lower the S&P 500 EPS
The bank also noted that US elections taking place in November adds to the menu of uncertainties facing earnings.
In the case of a Joe Biden victory in November, Goldman Sachs says it expects S&P 500 earnings per share will be $20 lower in 2021 than currently expected if he is able to pass his ambitious plan of tax increases.
"If enacted, we estimate that the Biden tax plan would reduce our S&P 500 earnings estimate for 2021 by $20 per share, from $170 to $150," the note said.
"This estimate includes raising the statutory federal tax rate on domestic income from 21% to 28%, doubling the GILTI tax rate on certain foreign income, imposing a minimum tax rate of 15%, adding an additional payroll tax on high earners, and a drag on US GDP of a similar magnitude to the boost the TCJA created in 2018."
Outside of tax reform, Goldman Sachs identified regulation, infrastructure, and trade policies as potential upside and downside risk factors to S&P 500 EPS.
The bank added: "This week, [Democratic nominee Joe] Biden outlined a $700 billion economic plan focused on fiscal stimulus. Large fiscal expansion would likely provide a tailwind to economic growth and S&P 500 EPS."