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The Tell: Earnings season to give stock-market investors update on ‘heavily debated’ consumer health, says Goldman

With the U.S. second-quarter earnings reporting season kicking off, investors will get a view of consumer health in an economy still stuck with high inflation as the stock market climbs this year.

“Investors have heavily debated the health of the consumer, and results from the consumer discretionary and staples sectors will provide a status update,” Goldman Sachs Group analysts led by chief U.S. equity strategist David Kostin said in a recent research note. 

Consensus estimates see profits of companies in the S&P 500 index during the second quarter falling 9% on a year-over-year basis, according to the note. While the index’s net profit margins are seen shrinking year over year for the fourth straight quarter, analysts expect consumer-discretionary stocks to see theirs expand the most among the few sectors with anticipated expansions, Goldman said.

The S&P 500’s consumer-discretionary sector index

has surged almost 33% this year based on Tuesday afternoon trading levels, compared with a slightly more than 15% gain for the broader index, according to FactSet data, at last check. By contrast, the consumer-staples sector

was down more than 1% so far this year over the same period.

“Our consumer staples analysts forecast an end to the food industry’s exceptional growth as inflation-led sales growth moderate,” the Goldman note says. “2023 EPS estimates for consumer staples have been cut by 1% since the start” of the second quarter. 

Within the sector, Conagra Brands Inc.

and PepsiCo Inc.

are expected to report their latest quarterly earnings results on Thursday, the note shows. 

Meanwhile, the S&P 500’s consumer-discretionary sector has benefited this year from homebuilders, a pocket of the stock market that has soared, as well as a pair of megacap companies often associated with Big Tech, Tesla Inc.

and Inc.
according to FactSet data. Big Tech has been driving the S&P 500’s gains in 2023.

On the homebuilding front, Goldman analysts cited Lennar Corp.

as seeing “continued demand strength heading into the summer.” 

Read: Homebuilder ETF outperforms S&P 500, industry’s stocks still ‘cheap’ in 2023 market rally

Looking at the S&P 500 broadly, “forward earnings revisions appear to have bottomed,” after bottom-up consensus estimates for earnings per share in 2023 and 2024 “steadily declined” between the start of the year and first-quarter earnings season, according to the note. 

Goldman has forecast the S&P 500 will see EPS of $224 in 2023, which represents 1% growth and is above consensus estimates for $220, according to the note. The baseline forecast assumes the U.S. economy “avoids a recession and inflation falls slowly.” 

But Goldman thinks predictions for next year are “too optimistic.” Goldman’s 2024 EPS forecast of $237, representing 5% growth, remains below bottom-up consensus estimates of $244, the note says. 

During the second-quarter earnings season, Goldman will be monitoring “companies’ ability to push sales to drive profits,” the bank’s analysts said. “Firms can expand margins provided price inflation outpaces input cost inflation.”

A reading from the U.S. consumer-price index on Wednesday will provide a measure of inflation in June. While the surge in cost of living has eased from its 2022 peak, the Federal Reserve remains focused on lowering inflation to its 2% target.

On Tuesday afternoon the U.S. stock market was trading up ahead of the CPI inflation report, with the S&P 500

rising 0.3% while the Dow Jones Industrial Average

climbed 0.6% and the Nasdaq Composite

edged 0.1% higher, according to FactSet data, at last check. 

The S&P 500 was trading around 4,422 on Tuesday afternoon, below Goldman’s 2023 forecast. The bank’s analysts expect the index will end this year at 4,500.

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