Goldman says one major issue will plague earnings season. But these stocks won't be affected

Published Mon, Oct 10 20221:24 PM EDT

As Wall Street kicks off third-quarter earnings this week, Goldman Sachs expects investors will likely hear one major issue come up again and again during management calls: the stronger dollar. The investment bank said that U.S. companies that rely on revenues generated abroad will face challenges this earnings season, according to a Friday report from Goldman Sachs' David Kostin. The chief U.S. equity strategist forecasts fewer positive surprises this earnings season. "The most common phrase during upcoming 3Q earnings calls will be 'but on a constant currency basis ...'" Kostin wrote. "A stronger USD has been historically correlated with a lower frequency of sales beats. The implied relationship between dollar strength and top-line results suggests that fewer S & P 500 firms will beat consensus sales forecasts in 3Q compared with 49% in 1Q and 45% in 2Q 2022," he added. Investor expectations for this earnings season have deteriorated alongside rising inflation and a ramp up in rate hikes from the Federal Reserve. Goldman Sachs forecasts EPS, excluding energy, to decline by 3% and margins to narrow by 132 basis points (1.32 percentage points). Still, Goldman identified companies that won't be affected as much by the strength of the U.S. dollar. The strategist compiled a screen of companies that generate all their sales domestically, compared with those that see more international sales. "Since July, consensus has trimmed 3Q EPS for the median constituent of our Domestic Sales basket (GSTHAINT) by 1% and left 2023 estimates unchanged," read the report. "In contrast, 3Q EPS for the median International Sales basket (GSTHINTL) constituent with 73% non-US sales has been cut by 4% and 2023 estimates have reduced by 3%." Here are 11 stock picks that won't be hurt by the stronger dollar. Charter Communications , the telecommunications parent of Spectrum, generates all of its sales in the U.S., and is expected to trade at 9 times its earnings over the next 12 months. The stock is down 50% as of October 6. Dollar General is expected to trade at 20 times its earnings over the next year. The stock outperformed this year, up 3%, as investors pivoted into the discount retailer as recession concerns grew. "[We] believe the dollar stores are well positioned, as a channel, to gain share and profitability in a challenging macro backdrop that favors consumables over discretionary purchases," Guggenheim's John Heinbockel wrote in an August note . Southwest Airlines , which is down 24% this year, is forecast to trade at 11 times its earnings in the next 12 months. The carrier's 2023 earnings per share growth is expected to jump 49%. By contrast, Goldman Sachs said names that will be hurt by a stronger dollar include Las Vegas Sands , Philip Morris International and Aflac . Those companies generate a majority or all of their sales abroad.