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Tuesday, October 8, 2019
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10% earnings growth in 2020?
Earnings season is about to heat up as big banks report their Q3 financial results next week. For investors, earnings season is less about what management reports about the past and more about what management forecasts for the future. After all, the value of a stock overwhelmingly depends on the outlook for earnings.
According to Factset, the average Wall Street analyst expects S&P 500 (^GSPC) earnings to grow 10.5% in 2020.
But many of Wall Street’s most prominent banks are telling clients that ain’t happening. In a note to clients on Monday, Morgan Stanley U.S. equity strategist Michael Wilson took a chart with that consensus 2020 earnings forecast and annotated it with two words: “Looks unrealistic.”
“Consensus expects S&P 500 EPS will rise by 10% in 2020 compared with our top-down forecast of 6%” Goldman Sachs U.S. equity strategist David Kostin said on Friday. “Consensus expects margin expansion of 54 bp will drive aggregate EPS growth. However, we forecast profit margins will only rise by 14 bp as input costs continue to challenge the increase in prices charged. Many firms have been unable to keep pace with their input cost inflation.”
Some of these more cautious strategists point to a slew of underestimated cost pressures including from higher costs of goods amid the trade war and rising wage costs amid the increasingly tight labor market.
Others warn that revenue could disappoint amid the shaky economic backdrop. On Monday, Bank of America Merrill Lynch U.S. equity strategist Savita Subramanian said: “2020 consensus numbers still look too high to us... which we think are overly optimistic given macro data.”
So, what’s going on with these consensus 2020 numbers that seem to be getting no love from anyone willing to speak up?
Morgan Stanley’s Wilson attributes it to the fact that very few companies have actually provided their own forecasts for 2020.
“As we have moved through this year and watched earnings guidance come down every quarter, the estimates have followed,” Wilson said last week. “However, the numbers haven’t changed as much for 2020 because companies don’t guide that far out, leaving 2020 estimates unrealistic, in our view.”
For what it’s worth, strategists say their clients are just as skeptical.
“Not surprisingly, investors are reluctant to buy into such optimism given anemic near-term earnings and weak economics,” Credit Suisse U.S. equity strategist Jonathan Golub said. “Many are quick to warn that projections will invariably fall, putting pressure on stock prices.”