Here's What to Expect from Q3 Earnings Season as per Goldman Sachs

© Reuters.

By Senad Karaahmetovic

Goldman Sachs' equity strategists believe the focus during upcoming Q3 earnings calls would be on the impact of a stronger dollar on profits.

Big banks are about to kick off the Q3 earnings season later this week with consensus calling for a 3% YoY EPS growth. However, excluding energy, EPS is expected to drop by 3%.

"We expect smaller positive surprises in 3Q compared with 1H 2022 and negative revisions to 4Q and 2023 consensus estimates," the strategists told clients in a note.

The strategists urged the bank's clients to focus on three risks to the upcoming Q3 earnings season and 2023 estimates:

1. Headwinds to sales growth (dollar strength);
2. Headwinds to margins with the focus on the health of consumer; and
3. Taxes.

Despite several major negative updates, including from FedEx (NYSE:FDX), Micron (NASDAQ:MU), and AMD (NASDAQ:AMD), the strategists note that analysts have lowered 4Q 2022 EPS estimates by "just 1% YTD and still expect 7% year/year growth."

"Full year 2023 EPS estimates have been reduced by only 2% YTD and consensus forecasts annual EPS growth of 7% powered by 5% growth in revenues and 11 bp of margin expansion," the strategists added.

For this reason, the strategists expect to see more negative revisions to S&P 500 consensus 2023 EPS estimates.

"We forecast 2023 EPS of $234 (+3% growth) in our baseline, soft landing scenario. This is below the current bottom-up consensus forecast of $241 (+7% growth). In this scenario, 2023 sales growth will decelerate to 4% and margins will contract by 25 bp to 12.0%. The S&P 500 will end this year at 3600 (15x forward P/E) and 2023 at 4000 (16x P/E)."

In a hard landing scenario, Goldman Sachs sees earnings dropping to $200, which should translate to the S&P 500 at 3150.

Ultimately, the strategist urged the firm’s clients to focus on owning stocks that have high U.S. sales vs firms with high foreign sales.