Goldman: Earnings season to knock stocks. Here's how to play it

Published Mon, Oct 10 20161:30 PM EDT

The sideways trading market in the past three months may be about to head down, as a disappointing earnings season will cause investors to sell stocks, according to a new report from Goldman Sachs. "We see a weak 3Q [third quarter] reporting season coupled with negative 4Q EPS [fourth quarter earnings per share] revisions pushing stocks 2% lower to our year-end target of 2100," warns David Kostin, Goldman's chief U.S. equity strategist. In the next three weeks, 66 percent of S & P 500 companies are slated to report third-quarter earnings, with consensus expectations pointing to a 1 percent drop in earnings for the S & P index . Similarly, revenue figures are projected to increase by 4 percent, but top-line growth will be offset by shrinking margins across most sectors, said Kostin. Here's how the investment bank advises clients to shelter from the volatility: Source: FactSet "Variables that determine earnings surprises – changes in US economic growth, interest rates, oil price, the dollar, and EPS revisions – suggest a below-average share of firms will report positive EPS surprises (43% vs. 46%)," wrote Kostin. "Declining oil prices will weigh on energy firms but should continue to serve as a modest benefit to the earnings of companies in other sectors," he wrote. The trend of falling interest rates will hamper results from financial firms in particular, according to Kostin, who points to shares of regional banks such as KeyCorp and Fifth Third Bancorp as two examples of the firms expected to disappoint. "Since June, consensus has lowered 3Q EPS forecasts in most sectors, with Energy EPS slashed by more than 30%. A disappointing 3Q earnings season will spark negative revisions to 4Q EPS estimates, which are overly optimistic in our view," wrote Kostin. As a result, the strategist advises clients to stick with defensive stocks until the volatility subsides. "While cyclicals have outperformed defensives by 9 percentage points during the last three months (7% vs. -2%), a disappointing earnings season is one reason why the outperformance will not persist," wrote Kostin. "A poor earnings season could pressure stocks, sending the market index lower and pushing investors back toward defensives. Additional negative EPS revisions and rising uncertainty in advance of the presidential election add to the case for defensive firms," he said.

The Goldman Sachs booth on the floor of the New York Stock Exchange

Getty Images

The sideways trading market in the past three months may be about to head down, as a disappointing earnings season will cause investors to sell stocks, according to a new report from Goldman Sachs.

"We see a weak 3Q [third quarter] reporting season coupled with negative 4Q EPS [fourth quarter earnings per share] revisions pushing stocks 2% lower to our year-end target of 2100," warns David Kostin, Goldman's chief U.S. equity strategist.

In the next three weeks, 66 percent of S&P 500 companies are slated to report third-quarter earnings, with consensus expectations pointing to a 1 percent drop in earnings for the . Similarly, revenue figures are projected to increase by 4 percent, but top-line growth will be offset by shrinking margins across most sectors, said Kostin.

Here's how the investment bank advises clients to shelter from the volatility: