Goldman raises 2020 earnings estimates and believes profits will post a big surprise next year

Published Mon, Aug 10 20208:50 AM EDT

(This story is for CNBC Pro subscribers only.) This strong earnings season is giving Goldman Sachs more conviction that companies can recover from the coronavirus recession faster and stronger than expected. The Wall Street firm hiked its 2020 S & P 500 earnings estimate to $130 per share from $115 per share. Goldman's new estimate implies about a 20% decline in growth for earnings compared to last year. "Earnings season is coming to a close and S & P 500 results cleared an extremely low bar," Goldman Sachs chief economist David Kostin told clients. Second quarter earnings blew past expectations as companies navigated the coronavirus recession better than Wall Street thought possible. Nearly 90% of companies have reported earnings so far and 58% beat expectations, Goldman noted. The second quarter beat rate is well above the long-term average of 47% and matches the level following the financial crisis. "However, consensus bottom-up earnings estimates had been drastically cut ahead of 2Q earnings season," added Kostin. So far, S & P 500 earnings fell 34% year-over-year in the second quarter, while the consensus expected a drop of 44% at the start of earnings season. Goldman forecast a decline of 60%. "Cost management contributed to positive margin surprises, while the technology and large-cap tilts of the S & P 500 resulted in a shallower earnings decline than the economic environment would normally imply," said Kostin. Kostin said strength in the beloved FAAMG (Facebook, Apple, Amazon, Microsoft and Google-parent Alphabet) helped the S & P earnings picture. The FAAMG stocks represent 16% of S & P earnings and all five technology darlings topped estimates. The group's EPS grew by more than 2% year-over-year. "The FAAMG stocks benefit from secular trends expedited by the coronavirus, such as cloud spending and e-commerce, and continue to capture an increasing share of their respective markets," said Kostin. Goldman also said the strength in earnings gave the firm "greater confidence" in its above consensus earnings estimates for next year. The bank is expecting the S & P 500 to earn $170 per share, a 30% increase from this year's estimate. While the bank sees a quick earnings recovery for next year, Goldman expects the recovery to be uneven throughout different sectors. Kostin said Technology and Health Care will surpass 2019 levels by the end of 2021, while Financials and Energy will see a more gradual growth level due to low interest rates and low oil prices, respectively. — with reporting from CNBC's Michael Bloom.

Traders work during the opening bell at the New York Stock Exchange (NYSE) on March 19, 2020, at Wall Street in New York City.

JOHANNES EISELE | AFP via Getty Images

(This story is for CNBC Pro subscribers only.)

This strong earnings season is giving Goldman Sachs more conviction that companies can recover from the coronavirus recession faster and stronger than expected.

The Wall Street firm hiked its 2020 S&P 500 earnings estimate to $130 per share from $115 per share. Goldman's new estimate implies about a 20% decline in growth for earnings compared to last year.

"Earnings season is coming to a close and S&P 500 results cleared an extremely low bar," Goldman Sachs chief economist David Kostin told clients.