Profit forecasts are coming down as the economy slows and interest rates keep rising. Goldman Sachs generated a list of stocks it expects to earn much more than Wall Street predicts. Overall, the firm expects an economic “soft landing” and says the S&P 500 should rally 11% in 2023. It’s no surprise that profit projections for US companies are coming down. The economy is slowing, inflation remains high, and interest rates are climbing.
On its face, that sounds like a reason to be pessimistic about stocks, since profits are a key component of their valuations and a major contributor to market performance. But the truth is a little more complicated, as investors are inevitably going to get too bearish about some stocks and fail to recognize the challenges that others face.
Goldman Sachs took up that question in October by comparing its analysts’ estimates for companies’ earnings to 2023 consensus estimates collected by FactSet.
Perhaps surprisingly, the firm found that many of the most underestimated companies are in the energy sector, the one part of the market that seems to have the wind at its back, and the only major sector that’s delivered positive returns in 2022.
These estimates are part of Goldman’s “soft landing” scenario, where rising interest rates curb economic activity but don’t cause a recession. That’s the firm’s base case. In that outcome, it expects S&P 500 profits to grow 3% for the year, while the inflation-adjusted “real yield” on the 10-year Treasury note winds up at 1.3%.
In a less rosy “hard landing,” Goldman says profits would fall to $200 a share and real yields would fall to 0% at mid-year.
“In a soft landing scenario we expect the index to end the year at 3600 before rising to 4000 by year-end 2023,” the firm wrote in its quarter chartbook. “If investors price a hard landing scenario, we expect the index to fall to 3400 by year-end and trough around 3150.”
Today, profit projections are on their way down and Goldman expects minimal returns from the broader market over the final quarter of the year. Still, its base case includes an 11% recovery in 2023.
The following are the “Hold” and “Buy”-rated stocks where Goldman is forecasting an annual profit that is at least 20% greater than the FactSet consensus. They’re ranked from lowest to highest based on the percentage difference between the FactSet average and the projection from the Goldman analyst covering that stock.
All estimates are as of September 30.