Investors had a surprisingly sour reaction to first-quarter earnings results, even though the majority exceeded analyst forecasts.
That doesn’t bode well for the future of equities as traders begin to prepare for a market-wide earnings growth slowdown.
Goldman Sachs says investors should instead focus on companies set to see strong revenue growth through the end of 2019, and singles out 13 stocks that fit the bill.
Heading into this past earnings season, analyst expectations were extremely lofty. And then something surprising happened: companies beat them anyway.
But the surprises didn’t end there. Even as corporations handily exceeded forecasts, investors failed to reward them with stock gains commensurate to their outperformance, according to Goldman Sachs. To make matters even dicier, firms that missed earnings were punished to a greater extent than usual.
To say these were tough conditions is an understatement, especially considering S&P 500 earnings-per-share grew by 23% during the quarter, the most since 2011.
So what gives? Is the traditional way for traders to play earnings season outdated? Goldman has some ideas.
The firm argues the lack of share price follow-through stems from investors thinking — perhaps correctly — that profit growth has peaked for the cycle, leaving nowhere to go but down. It’s a view that’s shared across Wall Street, with firms like Morgan Stanley and BlackRock already voicing similar concerns.
Goldman has a solution for picking stocks going forward: Go further up the income statement and assess companies based on top-line revenue. The firm says that in an environment of slowing economic growth — like the one currently facing investors — it’s the companies capable of growing sales that stand apart.
The chart below shows this dynamic in play. Over the past year, a Goldman-curated basket of high-revenue-growth stocks has beaten the S&P 500 …read more
Source:: Business Insider