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Gain valuable insights into the state of consumer health during the earnings season. Discover the projected expansions and contractions in different sectors.
The U.S. second-quarter earnings reporting season has arrived, and investors eagerly anticipate a glimpse into the consumer health of an economy grappling with persistent inflation while the stock market continues to climb. Goldman Sachs Group analysts, led by chief U.S. equity strategist David Kostin, assert that the health of the consumer has been a heavily debated topic among investors. Therefore, the upcoming results from the consumer discretionary and staples sectors are expected to provide a crucial status update. In this article, we will explore the implications of the earnings season and shed light on the anticipated expansions and contractions within different sectors.
1. Introduction
The second quarter of the year brings with it the earnings reporting season, a period during which companies release their financial performance results for the previous quarter. This information allows investors to gauge the overall health and profitability of businesses and make informed decisions regarding their investments. The consumer health of the economy has been a subject of intense discussion among investors, prompting Goldman Sachs to analyze the performance of the consumer discretionary and staples sectors. Let us delve into the key findings and expectations.
2. Consensus Estimates and Projections
According to Goldman Sachs, consensus estimates project a 9% year-over-year decline in profits for companies listed in the S&P 500 index during the second quarter. Furthermore, the net profit margins of the index are expected to shrink year over year for the fourth consecutive quarter. However, amidst this contraction, analysts anticipate that consumer discretionary stocks will experience the most significant expansion among the few sectors expected to grow.
3. Performance of Consumer-Discretionary and Consumer-Staples Sectors
The consumer-discretionary sector of the S&P 500 index has exhibited remarkable growth this year, surging over 33% as of Tuesday, compared to the broader index’s gain of 15.6% (FactSet data). Conversely, the consumer-staples sector has experienced a 1% decline during the same period. Goldman Sachs notes that the exceptional growth in the food industry is projected to moderate due to inflation-led sales growth, resulting in a 1% reduction in 2023 earnings-per-share (EPS) estimates for consumer staples since the beginning of the second quarter.
4. Key Players and Expectations
Within the consumer-staples sector, Conagra Brands Inc. and PepsiCo Inc. are expected to announce their latest quarterly earnings results on Thursday, according to Goldman Sachs. Meanwhile, the consumer-discretionary sector has been buoyed by the impressive performance of homebuilders and prominent companies like Tesla Inc. and Amazon.com Inc. These factors have contributed to the overall gains of the S&P 500 index in 2023.
5. Forward Earnings Revisions and Forecasts
Goldman Sachs highlights that forward earnings revisions seem to have bottomed out after a decline in consensus estimates for 2023 and 2024 earnings per share during the first quarter. The investment bank predicts that the S&P 500 will achieve an EPS of $224 in 2023, representing 1% growth and surpassing the consensus estimate of $220. However, Goldman Sachs believes that the current optimism surrounding next year’s projections is too high. Their 2024 EPS forecast of $237, indicating 5% growth, remains below the bottom-up consensus estimate of $244.
6. Monitoring Sales and Profitability
Throughout the second-quarter earnings season, Goldman Sachs will closely monitor companies’ ability to drive profits through sales. The bank’s analysts emphasize that firms can expand margins if price inflation outpaces input cost inflation. The ability of companies to strike this balance will be crucial in determining their overall financial health and market performance.
7. Inflation and Market Response
On Wednesday, the U.S. consumer-price index will provide valuable insights into the inflationary trends of June. While the surge in the cost of living has subsided from its 2022 peak, the Federal Reserve remains committed to reducing inflation and achieving its target of 2%. The stock market responded positively on Tuesday, with the S&P 500 rising by 0.7%, the Dow Jones Industrial Average climbing 0.9%, and the Nasdaq Composite gaining 0.5% (Dow Jones Market Data). The S&P 500 closed slightly below Goldman Sachs’ 2023 forecast at 4,439.26, and the bank expects the index to reach 4,500 by the end of this year.
Conclusion
The earnings season provides valuable insights into the consumer health of the economy, allowing investors to make informed decisions regarding their portfolios. As investors eagerly await the results, the consumer discretionary and staples sectors will be under scrutiny. Goldman Sachs expects expansion within the consumer discretionary sector and a potential moderation in the exceptional growth seen in the food industry. Additionally, they caution against overly optimistic projections for the future. The second-quarter earnings season will shed light on companies’ ability to drive profits amidst prevailing inflationary pressures. Market participants will closely follow the U.S. consumer-price index to gauge inflation trends, while anticipating positive market performance as the stock market continues its upward trajectory.
FAQs
What is the earnings reporting season?
The earnings reporting season is a period during which companies release their financial performance results for the previous quarter. It allows investors to assess the overall health and profitability of businesses.
Why is consumer health important for investors?
Consumer health is a vital indicator of economic well-being. Investors closely monitor the consumer discretionary and staples sectors to gauge the overall health and performance of the economy.
What are the expected earnings-per-share projections for the second quarter?
Consensus estimates project a 9% year-over-year decline in profits for companies in the S&P 500 index during the second quarter.
Which sectors are anticipated to experience growth?
Among the few sectors expected to grow, consumer discretionary stocks are predicted to see the most significant expansion.
What factors are contributing to the performance of the S&P 500 index?
The S&P 500 index has been positively influenced by the impressive performance of homebuilders and prominent companies such as Tesla Inc. and Amazon.com Inc.