It’s that time of year again.
Earnings expectations for the third quarter, which unofficially kick off next week with reports from major banks like JPMorgan Chase (JPM), are looking grim.
Wall Street is expecting a 3% year-over-year decline in S&P 500 (^GSPC) earnings per share.
“If realized, 3Q would mark the first year/year decline in quarterly EPS since 2Q 2016 and since 2Q 2009 when the Energy sector is excluded,” wrote Goldman Sachs analysts, led by chief U.S. equity strategist David Kostin, in a note to clients.
The culprit? Margin compression. “Excluding Financials and Utilities, S&P 500 margins are expected to contract by 108 bp, more than offsetting forecast sales growth of 5%,” the analysts wrote. “Margins are projected to decline in every sector.”
Though the analysts remind investors that stocks with high leverage may see a boost to margins as interest rates have come down precipitously over the past several months. “The 10-year Treasury (^TNX) yield averaged 1.8% in 3Q 2019 compared with 2.9% a year ago,” Goldman Sachs analysts wrote.
Positive surprises
While expectations are pricing in an earnings per share decline for the third quarter, Wall Street was also expecting a decline in the beginning of the first and second quarter earnings seasons earlier this year. Fears of an earnings recession reached fever pitch. But the declines didn’t materialize.
That’s because corporate tax rates actually came in lower than what analysts had expected, according to Goldman Sachs.
“Analysts overestimated corporate tax rates in 1Q and 2Q. The effective 1Q tax rate was 310 bp lower than consensus expected at the start of the quarter (22% vs. 18.9%), and 140 bp lower in 2Q (21% vs. 19.6%),” the analysts wrote. “The 3Q tax rate estimate of 20.1% stands 50 bp above last quarter’s realized rate.”
2020 outlook
While Wall Street is expecting a 6% decline in year-over-year earnings per share for all of 2019, the 2020 consensus is for 10% growth.
Goldman Sachs’ 2020 earnings per share forecasts are a little less rosy, with growth of 6% amid rising input costs.
“Many firms have been unable to keep pace with their input cost inflation,” the analysts said.
Scott Gamm is a reporter at Yahoo Finance. Follow him on Twitter @ScottGamm.
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