Goldman Predicts Huge Earnings Miss for S&P 500

Stocks are soaring again this morning to start out a critical week of corporate revenues. Earnings season is here, and if Q2’s numbers don’t impress, investors could flee the market in droves.

For the time being, however, the bulls are buying. The Dow (+1.60%), S&P (+1.30%), and Nasdaq Composite (+1.80%) are all up significantly on the day despite even more record-breaking Covid-19 infection totals.

Florida alone reported 15,299 new cases on Sunday, making up more than a quarter of the 60,000 cases confirmed in the entire U.S.

And while numbers like that would’ve sent equities spinning in months prior, these days, they have little effect on sentiment. The market seems optimistic that a vaccine or treatment solution will soon arrive. Earlier today, two of Pfizer’s vaccine candidates were granted “fast track” designation by the FDA, removing the typical regulatory hurdles that stand in the way of vaccine deployment.

Still, nobody quite knows when (or if) the vaccines will be ready for the general population. The news did manage to counteract the market impact of last weekend’s coronavirus infections, though.

“COVID remains a huge problem w/cases, hospitalizations, and fatalities all climbing,” said Adam Crisafulli, founder of Vital Knowledge, in a note on Sunday.

“The market continues to absorb all this information relatively well and this seems to be a function of vaccine hopes, lower fatality rates vs. Mar/April, the avoidance of wholesale lockdowns, and the lack of a resurgence in the Northeast (esp. NYC).”

We’ve mentioned before that the rise in cases was a “double-edged sword.” The more Covid-19 spreads, the lower the mortality rate drops.

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We also said that, eventually, the narrative would shift to the disease’s rock-bottom mortality, not the number of cases, when the death rates fell low enough.

The fact that investors are ignoring the coronavirus this morning may be confirmation that a refocusing is starting to occur.

But that doesn’t necessarily mean equities will embark upon another “leg up” in the coming weeks. Because in addition to Covid-19, the market will have to face-off with corporate earnings.

And according to Goldman Sachs analysts, investors might not like what they see.

In terms of earnings per share (EPS) for S&P 500 stocks in Q2, economists estimate a 44% drop year over year.

Goldman, meanwhile, predicts a massive EPS “miss” relative to the consensus. The Wall Street firm says EPS will actually tumble 60%, far worse than expected.

If that happens, the market should plunge, too. Not even high-flying FAANG earnings would be able to prevent an equity deflation if EPS disappoints and, more importantly, guidance remains uncertain about the future.

For Q1 earnings, EPS didn’t really matter. The U.S. was in the thick of the pandemic. Analysts had no clue what to expect.

For that reason, earnings guidance had a much larger impact on the direction of the market. Corporate leaders weren’t sure about what was to come back then. Nobody could blame them for taking that stance.

Now, however, they should have a better idea of what the next few quarters will hold. If CEOs play the same card as before – that they simply can’t give any guidance – investors may get frustrated as a result.

Especially if EPS clocks-in lower than expected.

So, even though the market looks intent on punching higher today, investors need to realize that there’s still plenty of downside risk. Earnings season is here, and depending on how it goes, we could find ourselves back at April or even March-like valuations.

Corporate earnings should inject more chaos into an already volatile market at the very least. And at the top of an extended rally, that’s the last thing bulls want to see.

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