Goldman's new forecast should worry bulls, as firm predicts earnings may grow just 3% this year

Key Points
  • Goldman Sachs says 2019 earnings growth could be as low as just 3 percent because of slow economic growth, a strong dollar and low oil prices.
  • Corporate outlooks coming out during this upcoming earnings season will determine the short-term direction of the S&P 500, the firm says. If analysts are forced to revise their numbers down, it could mean negative returns for stocks.
  • Avoid companies with sales highly leveraged to economic growth like materials and industrials, Goldman says.
The Apple logo is seen on the window at an Apple Store on January 7, 2019 in Beijing, China.
Kevin Frayer | Getty Images

Goldman Sachs is predicting that earnings growth in 2019 could be quite disappointing, advising clients to steer clear of companies leveraged to strong economic growth. 

In a research note to clients this weekend, the firm gave a forecast that should worry bullish investors, warning that the waning fortunes of several big consumer brands were sounding a warning about corporate profits this year.

"Weak guidance from several notable companies such as Apple and Macy's have heightened the focus on S&P 500 earnings growth," wrote David Kostin, chief equity strategist for the firm.

"Earnings had been one of the clear bright spots for U.S. equities throughout much of 2018, but some investors are now questioning whether profits can continue to grow in 2019," he added.

Fourth-quarter earnings season is about to kick off. After it's all said and done, 2018 total earnings growth will come in at a whopping 22 percent, Goldman estimates, juiced by the tax cut. But that's in the past: During this upcoming earnings season, company outlooks could be cautious and reflect fears of slowing economic growth this year, the firm said.

For now, Goldman's "baseline" scenario is for earnings to increase for S&P 500 companies by 6 percent in 2019. But that figure assumes a pace of economic growth faster than what Goldman's own economists believe will come to fruition.

Just 3% earnings growth

"Recent weakness in the macro landscape could drive up to $5 of potential downside to our 2019 EPS (earnings per share) estimate (to $168). Our economics team now forecasts average annual real GDP growth of 2.4 percent for the US (-20 bp vs. baseline) and 3.5 percent for the world (-30 bp vs. baseline)," the note said.

Bottom line: Goldman said earnings growth could come in at just 3 percent this year when taking into account additional factors such as a stronger dollar and falling oil prices.

Investors need to ask themselves whether earnings growth of just 3 percent is enough reason to keep bidding up stock prices from their fourth-quarter depths. The is up 3.6 percent so far in 2018 after two weeks of gains. Stocks are higher even after retailer Macy's posted its worst trading day ever on Thursday after cuttings its profit and sales outlook. Apple started the year with a warning that global iPhone sales would fall short because of a weakening Chinese economy.

Goldman is signaling to clients that the market could pull back during this earnings season beginning next week as the tepid company forecasts force analysts to bring down their numbers for the rest of the year:

"Equity prices have tracked negative earnings revisions, but earnings season will represent an important litmus test for the near-term path of the S&P 500. FY2 EPS revisions sentiment, defined as the number of positive EPS revisions less the number of negative EPS as a share of total revisions, has slipped into negative territory...With no nascent signs of slowing negative revisions, the strength of 4Q results and management commentary around the outlook for 2019 will take on heightened importance for whether earnings estimates (and returns) stabilize in the near term."

As overall economic and earnings growth expectations slow, Goldman is recommending clients steer clear of stocks with "betas to economic growth," especially the materials and industrial sectors.

— With reporting by Michael Bloom