Goldman Ups Profit Estimates Amid Record Beat Rate: Taking Stock

(Bloomberg) — Goldman Sachs strategists raised their profit estimates for the S&P 500 after a record number of companies beat analyst expectations.

Strategists at the bank led by David Kostin lifted their 2020 EPS estimates to $130 from $115, expecting an overall 21% profit contraction versus last year’s levels. The second-quarter results also re-affirmed the team’s confidence in their 2021 EPS estimate of $170.

The index’s composition helps explain the better-than-expected results, say the strategists. A second-quarter GDP contraction of 10% year-over-year should have amounted to a roughly 60% decline in EPS. However, the economic shock had an outsize impact on smaller firms, whereas large-cap companies were more insulated thanks to strong balance sheets and elevated profit margins.

“The strength of technology broadly, and specifically the market-leading FAAMG stocks, has also helped S&P 500 earnings fare better than what the economic environment would normally indicate,” the Goldman team wrote.

With the earnings season winding down, more than 80% of companies beat on profits for the second quarter, the highest proportion since Bloomberg began tracking the data since 1993. All combined, their earnings exceeded estimates by about 22%. Strategists are in disagreement over what accounts for the upside surprise. Those at Citigroup Inc., for one, say the CARES Act created billions in pretax savings for companies by shifting labor costs to the government. Others say better-than-expected economic data helped sales come in firmer.

Whatever the reason, analysts are now also bumping up third-quarter estimates. They expect profits for S&P 500 companies in the current quarter to fall 23%, better than the 25% drop expected just a month ago, Bloomberg Intelligence data show. However, fourth-quarter projections on a per-share basis have declined slightly over the last month, which to Nicholas Colas, co-founder of DataTrek Research, signifies the numbers could have room to rise, with further upside revisions to come.

Futures on the S&P 500 rose 0.5% premarket, gaining after President Donald Trump said he’s considering a cut on the capital gains tax. The advance may position the gauge to retake its pre-pandemic record close. In Europe and Asia, a broad rally from industrial goods to health-care shares set the Stoxx Europe 600 Index headed for its best increase since mid-June.

Notes From the Sell Side

Honeywell International was downgraded to sector perform at RBC Capital Markets, which wrote that the company was “likely to lag in a cyclical rebound.” The company “remains in the throes of protracted downturns” in major businesses, and while the valuation “is undemanding here, we see few catalysts over the near-term.”

Separately, RBC upgraded Johnson Controls International to outperform, writing that the company was “managing COVID-19 headwinds well,” and seeing new demand for a number of product categories. Both rating changes come as RBC is “tilting our recommendation weightings toward more cyclical names,” as “the Flight to Quality phase has mostly run its course.”

Tegna was upgraded to overweight at Wells Fargo Securities, which sees a tailwind from increased political advertising heading into the election. The company is facing “a political perfect storm with competitive Congressional or Presidential races” across a number of states, and “we don’t think TGNA would increase their guide by >20% unless they were VERY confident.” The increased spending in political cycles “is starting to feel more structural, potentially improving the cash flow [return on investment] for prospective buyers.”

Consolidated Edison was downgraded to sector weight at KeyBanc Capital Markets, which cited regulatory risks in New York State. The announcement of an investigation into ED’s response to outages from Tropical Storm Isaias raises “the issue of the possibility of revoking the Company’s franchise in NY,” and “will likely create an overhang on the shares” in the near term. Analyst Sophie Karp prefers “a more cautious approach as the story develops,” especially as there are “limited positive catalysts on the horizon.”

Sectors in Focus

Casino stocks are set to have a strong day after China said it will resume issuing tourist visas for visitors to Macau. Visas for both individual and group tours to Macau from the mainland will be restored in phases. U.S.-listed casinos with Macau operations – Wynn Resorts, Las Vegas Sands and MGM Resorts – were all up in premarket tradingRussia has registered its first coronavirus vaccine, President Vladimir Putin says at a televised meeting with government. It is, however, a conditional registration, and trials will continue while production gets underwayAirlines, cruise-line operators and hotels are poised for another day of outperformance, as shares rose strongly in premarket. Latest data from the Transportation Security Administration on Monday showed airline passenger numbers were on a stable to slightly upward trendWatch the highly-volatile electric vehicle stocks after China’s Nio forecast record auto deliveries for the third quarter and reported second-quarter gross margin of 8.4%, its first positive quarter since its shares were listed in New York in 2018

Tick-By-Tick to Today’s Actionable Events:

6am — July NFIB Small Business Optimism7am — BR earnings7:30am — LITE earnings8:30am — July PPI Final Demand10:30am — BWA presents at JPMorgan Auto conference

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