Goldman: Sell at this new high, poor earnings season looms

Published Mon, Jul 11 201611:29 AM EDT

A worse-than-expected earnings season especially for banks and Apple will cause the S & P 500 to pull back 5 to 10 percent from its current all time high, Goldman Sachs warns. "The current U.S. earnings recession will not end in 2Q [second quarter]," Goldman's market strategist David Kostin wrote in a note to clients over the weekend, explaining that factors like "rising political uncertainty, unstable global growth prospects, and decelerating buybacks" will add to the risk. The cautious outlook came just before the S & P 500 moved into intraday record-high territory Monday morning, up more than 7 percent from the benchmark's post-Brexit low. This earnings season will be marked by negative EPS growth for a seventh quarter and could put a lid on the recent gains, Kostin said. "Bottom-up consensus estimates suggest that S & P 500 adjusted EPS will fall by 3 percent year/year in 2Q 2016," Kostin said. "We expect that growth using operating EPS, S & P's preferred metric, will also be negative, marking the seventh consecutive quarter with negative EPS growth. This has never happened [since 1967] outside of an economic recession." Here are the main catalysts that could make or break this earnings season, according to Goldman Sachs. The financial sector will be particularly hit this earnings season, according to Kostin's analysis. Within the S & P 500, the group is the only sector trading in the red this year, down 3 percent. "Management commentary from banks regarding the low interest rate environment and the business impact from Brexit will likely be negative," Kostin said. "Reduced guidance will lead to negative EPS revisions for the sector." In fact, Goldman recommends investors don't get caught up on the reported numbers from financial firms, but on the subsequent guidance, since this metric will probably reflect the actual market environment. Energy , one of the main culprits for dragging earnings figures lower in the past few quarters, will continue to lag despite the recent bounce in oil prices . "Oil prices have surged by 66 percent since hitting their January lows, but on average crude oil in 2Q 2016 was 26 percent lower than in 2Q of last year," Kostin said. "On an adjusted basis, Energy EPS is expected to equal $0.35, nearly 80 percent below 2Q of last year." "The continued decline in Apple margins will weigh on profitability in the Information Technology sector, which itself has driven S & P 500 margin strength this cycle," Kostin wrote. "Info Tech contributed two-thirds of the S & P 500 margin expansion from 2009 to 2015, and Apple alone was responsible for more than 25 percent of that S & P 500 margin growth." Shares of Apple, the world's biggest company by market cap, fell more than 20 percent in the past year as the pace of its earnings growth slowed down. Apart from the factors listed above, Goldman Sachs believes the economic picture remains fragile, while the strength of the dollar remains an obstacle for multinational firms. The investment bank wrote that analysts' estimates have been "modest" for the upcoming quarter, but they will soon change once management shares the true state of the economy. "A worse-than-expected earnings season will be followed by negative consensus revisions to the remainder of 2016 EPS, as management teams highlight risks around lower economic growth and increased policy uncertainty," Kostin said. To be sure, the firm believes that the U.S. economic expansion will continue, causing the S & P 500 to rally toward the end of the year back to where it is today, around 2,100.

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

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A worse-than-expected earnings season especially for banks and Apple will cause the S&P 500 to pull back 5 to 10 percent from its current all time high, Goldman Sachs warns.

"The current U.S. earnings recession will not end in 2Q [second quarter]," Goldman's market strategist David Kostin wrote in a note to clients over the weekend, explaining that factors like "rising political uncertainty, unstable global growth prospects, and decelerating buybacks" will add to the risk.

The cautious outlook came just before the S&P 500 moved into intraday record-high territory Monday morning, up more than 7 percent from the benchmark's post-Brexit low.

This earnings season will be marked by negative EPS growth for a seventh quarter and could put a lid on the recent gains, Kostin said.

"Bottom-up consensus estimates suggest that S&P 500 adjusted EPS will fall by 3 percent year/year in 2Q 2016," Kostin said. "We expect that growth using operating EPS, S&P's preferred metric, will also be negative, marking the seventh consecutive quarter with negative EPS growth. This has never happened [since 1967] outside of an economic recession."

Here are the main catalysts that could make or break this earnings season, according to Goldman Sachs.