Expect earnings to continue to surprise to the upside, says Goldman Sachs' Sharmin Mossavar-Rahmani

Key Concepts:

• Earnings per share (EPS)
• Consensus earnings
• Tariffs and their impact on inflation
• Noise vs. signal in market analysis
• Federal Reserve (Fed) independence
• FOMC (Federal Open Market Committee)
• Market sentiment
• Economic growth expectations

Earnings and Market Outlook

• Earnings Surprise: Goldman Sachs Wealth Management anticipates earnings will continue to surprise to the upside. Currently, about 8% of companies have reported, and the consensus earnings forecast is considered too low.
• Consensus Pessimism: The consensus expects a slight decrease in earnings per share (EPS), which is historically rare. EPS typically increases sequentially between Q1 and Q2, even during recessions (90% of the time). This pessimism sets a low hurdle for companies to exceed expectations.
• Economic Slowdown Priced In: The market has already factored in a weakening economy in the second half of the year. Growth expectations have been downgraded from over 2% to around 1.5%.
• Positive Market Outlook: Despite potential volatility, the overall market outlook remains positive, driven by expected earnings growth. Prices are expected to follow earnings trends.

Tariffs and Inflation

• Tariff Impact: Tariffs started the year at 2.5% and are now around 14%. The expectation is they will reach 15-20%. This will create inflationary pressures.
• Supply Chain Absorption: The exact impact of tariffs on the supply chain is uncertain, including how much producers, businesses, and consumers will absorb.
• Distribution of Tariff Burden: Goldman Sachs' global investment research estimates that initially, 20% of the tariff burden will be absorbed by producers, 40% by US businesses, and 40% by consumers. Over time, the consumer share might increase to 70%.
• Historical Context: Similar to the debate around "transitory" vs. "persistent" inflation during COVID-19, it will take time for economic numbers to filter out the noise from tariffs.

Market Timing and Strategy

• April Lows: The market has already demonstrated a strong recovery from previous lows, making it difficult to time the market perfectly.
• Noise vs. Signal: Separating noise from the signal is crucial in the current environment. There are valid points on both sides of the economic debate.
• Staying Bullish: Goldman Sachs Wealth Management maintained a bullish stance throughout the year, even adding to positions at the lows in April.

Federal Reserve and Market Impact

• Fed Independence: The independence of the Federal Reserve is a key concern, with many CEOs calling for its preservation.
• Powell's Potential Removal: If Fed Chair Jay Powell were removed, the market would likely experience a quick drop due to uncertainty. However, the impact on the long-term earnings of US companies would be minimal. The market sentiment would likely recover.
• FOMC Influence: The entire FOMC group and Board of Governors play a significant role, limiting the impact of any single individual.
• Rate Cut Expectations: The base case is that the Fed will cut rates 2-3 times, potentially starting in September.
• Presidential Pressure: It is common for presidents to pressure the Fed Chair, although the current administration's public approach is unusual.
• Historical Precedent: Presidents since Lyndon Johnson have attempted to influence the Fed, including President Reagan.

Notable Quotes:

• "Prices follow earnings."
• "Separate the noise from the signal."

Conclusion:

The key takeaways are that despite economic uncertainties and potential market volatility, Goldman Sachs Wealth Management remains optimistic about earnings and the overall market. They emphasize the importance of focusing on underlying earnings trends, separating noise from signal, and maintaining a long-term perspective. The impact of tariffs and potential changes at the Federal Reserve are significant factors to monitor, but the market is expected to adapt and recover.