The S&P 500 climbed 0.97% to close at 2,061.72 today after a losing week last week, but as first quarter earnings reporting season has now begun, Goldman Sachs analysts warn that they see downside risk to the index. They give three factors that create downside risk as earnings season moves into full swing.

Consensus estimates too high?

Analyst David Kostin and team mention that consensus estimates suggest earnings for the S&P 500 will be flat to grow slightly, although they’re projecting a decline of 9%. This is the first reason they see downside risk to the index.

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They believe earnings in the Financials sector will lead in disappointments while the Energy sector will take another hit from ceiling test write-downs. They say bottom-up consensus estimates for the index’s earnings excluding Energy suggest a 1% decline year over year, adding that just four of the ten sectors are expected to report growth in the first quarter, with Healthcare being on top. Financials and Industrials are expected to weigh heavily on first quarter results.

Second, they note that history shows that after releasing their earnings, most companies cut their earnings guidance for the net quarter, which results in downward full-year earnings estimate revisions. Third, they see the only source of demand for stock as coming from share repurchases right now but note that over three-quarters of the companies in the S&P 500 are able to execute any discretionary buybacks until early next month.

Currency headwinds to weigh on sales results

Among other issues, Kostin and team see currency headwinds and management guidance as being two negative factors this reporting period. They note that the U.S. dollar has weakened but only recently, so they expect the dollar to again have weighed on first quarter sales. In absolute terms, the currency is down 2% year to date, but the Goldman team adds that their trade-weighted index suggests that the dollar actually strengthened by 2% between the fourth and first quarters and appreciated by over 8% year over year.

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They note also that the S&P 500 generates one-third of its aggregate sales internationally, so they think the consensus estimate of a 3% gain in sales might “understate the true impact of the stronger trade-weighted dollar. As a result, they suggest that revenues were flat year over year in the first quarter.

Management guides to be negative

In the fourth quarter reporting period, guidance was arguably the biggest problem for companies, and we could see a repeat this time. Kostin and team believe management guidance will be mostly negative, noting that historically, 73% of companies have usually guided below consensus since 2006. Further, they said management guidance has become more and more negative after hitting the lows in the global financial crisis, coming in worse than average since 20012.

The Goldman team recalls that 114 companies offered first quarter guidance when reporting their fourth quarter earnings results. Of these companies, 95 guided for results that were lower than consensus.

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It’s expected that companies will provide second quarter guides over the next month, and the Goldman team believes the macro environment is worse now than it was in the last reporting season, basing their judgment on their U.S. Economics GDP estimate of 0.9% for the first quarter, compared to 1.4% in the fourth. They add that the S&P 500 “has taken a rollercoaster path to nowhere” as it now trades only about 0.2% higher than where it was at the end of 2015.

“Rose-colored glasses” on profits in the S&P 500?

Kostin and team also say analysts continue to overestimate earnings results for the S&P 500 even though decades of history shows that they’ve been doing this for a long time. They said that bottom-up estimates have been steadily falling every year since 2012 even though managements have been consistently guiding more negatively.

“Downward revisions for 2016 consensus bottom-up EPS estimates have been especially pronounced, driven by the collapse in oil price, persistent dollar strength, and a diminished outlook for Financials earnings,” they wrote. “We expect negative 2016 full-year EPS revisions will continue as management once again issue negative earnings guidance for the new quarter.”

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Money flow won’t drive upside for the S&P 500

The Goldman team also argues that money flow probably won’t be a catalyst for upside for the S&P 500 because most companies in the index are in their blackout windows for discretionary buybacks. Of course it is still possible to repurchase shares during these windows through repurchase plans, but the blackout period removes the possibility of additional purchases.

Goldman’s “buyback desk” estimates a one-third decline in flows during these blackout periods, which the firm’s analysts say is a “meaningful reduction in what is currently the only source of net demand for US shares.”