A new report from Goldman Sachs published yesterday, April 10th, focuses on the U.S. equities sector, and offers a relatively sanguine view for the rest of the year despite the ongoing sell off. The report highlights better weather and improving business conditions as likely primers for the economic pump in the second half of the year.
U.S. equities: Low expectations for Q1 2014 results
Goldman Sachs analysts Amanda Sneider et al. highlight that while Q1 S&P 500 (INDEXSP:.INX) earnings revisions were negative, longer-term forecasts from companies were more positive and in line with historical averages. “Analysts revised down earnings estimates as poor weather conditions, negative guidance, and legal settlements depressed their 1Q outlook. Bottom-up consensus 1Q EPS fell 4% during the quarter, versus 3% for the typical quarter. Although 1Q revisions were more negative than usual, 3-month revisions to full-year estimates were in line with history.”
The report also points out that bottom-up consensus analyst estimates suggest 2% earnings growth and 5% revenue growth among S&P 500 (INDEXSP:.INX) stocks for the first quarter.
Company commentary and forward guidance key
Sneider and colleagues are of the belief that management commentary and forward guidance will be more important than the actual numbers for most company earnings reports in Q1. They argue that investors are ready to forgive the already built-in poor Q1 numbers, and what they really want to see is proof of improving business activity.
The GS report anticipates most companies will tell investors what they want to hear. “We expect guidance will be less negative than usual. Bottom-up consensus full-year 2014 EPS are in line with our forecast of $116. We expect limited revisions to 2014 EPS following results.”
The analysts also highlight that S&P 500 (INDEXSP:.INX) options activity suggest investors are currently more worried about broad economic shocks and less concerned about individual stock events. When you examine 6-month option pricing, the average Put-Call skew is barely above historical lows, meaning most investors are not hedging their single stock option positions.