2019 was a remarkable year: the S&P's total return was over 30% even as S&P earnings for the year actually fell. Well, according to Goldman, 2020 is set to be similarly as remarkable, because in a note released overnight, Goldman's David Kostin writes that as of today, the bank expects US companies will generate no earnings growth in 2020, the second straight year without EPS growth despite record buybacks. This is what Kostin wrote:
We have updated our earnings model to incorporate the likelihood that the virus becomes widespread. Our revised baseline EPS estimates are $165 in 2020 (previously $174) and $175 in 2021 (previously $183), representing 0% and 6% growth. Our reduced forecasts reflect the severe decline in Chinese economic activity in 1Q, lower end-demand for US exporters, supply chain disruption, a slowdown in US economic activity, and elevated uncertainty. Consensus forecasts imply EPS will climb 7% in 2020 and 11% in 2021.
As Kostin elaborates, under his baseline forecast, COVID-19 disrupts supply chains for a prolonged period of time and weighs on US consumption ("widespread"). In sticking with Goldman's chronic optimism, the bank then assumes that the economic weakness will be short-lived, with most of the lost activity recouped in late 2020. Our estimates are well below consensus bottom-up forecasts for 7% and 11% growth in 2020 and 2021, respectively.
Just to cover its bases, Goldman also considers alternate scenarios where the impacts from the virus are contained or more severe. In these scenarios, it assumes growth recovers more rapidly (+3% EPS growth to $170 in 2020, "contained") or deteriorates more sharply (-13% EPS growth to $143 in 2020, "recession").
On other hand, if Goldman is once again overly optimistic - which it always is, recall the bank was predicting 4 rate hikes in 2019 and instead we got 3 rate cuts - Kostin gives an alternative scenario if the US enters a recession, "history suggests S&P 500 EPS would fall by 13% in 2020. If COVID-19 spreads rapidly, supply chain delays could persist, US consumer demand could plummet, and firms could lay off workers in an effort to maintain margins. Using 11 previous recessions since 1947, S&P 500 EPS typically fell by 13% from peak to trough (typically ~4 quarters). Although earnings recessions have been more severe during the past 30 years, consumer balance sheets are healthy and banks carry much stronger capital ratios relative to history. Under our recession scenario, we assume S&P 500 earnings fall by 13% from peak to trough and rebound by 10% during the subsequent four quarters.
Naturally, this scenario would be catastrophic to Goldman's clients who were never warned about this - Goldman itself 3 weeks ago was idiotically claiming that the US is virtually recession proof - and so Kostin had to hedge that as well, predicting a...