Goldman Sachs says there won’t be any earnings growth for S&P 500 companies this year, as the impacts of COVID-19 spread beyond China and to companies around the world.
To be clear, that doesn’t mean companies won’t be making money this year. It’s that they’ll be making the same profits they did last year, on average.
Why do we care about profit growth? So what if companies are only making as much money as they did last year? According to Gus Faucher, chief economist at PNC, growth is really important.
“If we don’t see increases in profitability, then we don’t see expansion efforts,” Faucher said. “So we don’t see businesses building new facilities, we don’t see businesses hiring more workers. We wouldn’t see rising wages.”
But if corporate profits are the same this year because of the COVID-19 outbreak, that’s not necessarily a huge problem.
“To be honest, one year of flat earnings growth doesn’t matter a whole lot,” said Scott Yonker, associate professor of finance at Cornell.
One year can be a blip. It doesn’t necessarily mean the U.S. is headed for a recession. Profits were basically flat in 2012, and the economy still expanded. Also, flat isn’t so bad. Yonker said you need to worry when profits are dropping — by a lot.
“It’s when you have big negative earnings growth that things matter,” Yonker said. “In ’07, ’08, that was the financial crisis. We saw earnings decline by 40%.”
And remember that this Goldman Sachs estimate is an average.
“The effects are going to be unevenly distributed across the economy,” Faucher said. Some companies’ profits might fall, in industries like travel and retail and energy, and some might go up.