Multinational investment bank Goldman Sachs estimates full-year corporate earnings in 2018 to be $159 per share, which equates to $9 more than their original earnings forecast–a result of faster-than-expected economic growth. Despite this optimism in earnings, Goldman Sachs Chief U.S. Equity Strategist David J. Kostin tamped down the idea that increased earnings in the short-term will translate to higher stock prices in the long-term.
“The US economy is growing, corporate profits are rising, and stock prices should continue to climb through 2019,” said Kostin. “However, the appreciation potential will be constrained by tightening monetary policy, a flattening yield curve, rising trade tensions, and the upcoming mid-term Congressional elections.”
Kostin’s statements come at a time when earnings per share have risen exponentially, particularly since the Financial Crisis of 2007-08. Since then, earnings per share have resumed its upward trajectory as evidenced in the following chart.
Moreover, Goldman Sachs predicts that 2019 will reveal an earnings per share forecast of $170 and $178 in 2020–all readjusted higher compared to their original forecasts.
Nonetheless, Kostin feels that more rate hikes could temper stock prices moving forward, especially after the Federal Reserve just raised interest rates last week by 25 basis points from 1.75 to 2.
“Ongoing policy uncertainty represents a key downside risk for US equity valuations,” said Kostin. “Many of these events pose limited fundamental risk, but could weigh on risk appetite and valuation.”
According to Kostin, bond yields that are moving higher at an alarming pace in conjunction with stock market gains could be a cause for concern. For example, in terms of the benchmark 10-year Treasury note, market analysts should focus on a monthly gain that exceeds 0.1 percentage points per month–a climate that could make way for lower stock market valuations.
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