Investors should prepare for tough times ahead, with some stocks in particular facing unsustainable margin growth expectations, according to David Kostin, chief US strategist at Goldman Sachs. Stocks have rallied recently, with the S&P 500 up about 13% from a mid-June low. Kostin noted that better-than-expected second-quarter earnings have supported that recovery. However, the macro outlook has deteriorated in recent months, he said. While the company’s outlook for 2022 earnings per share remains the same at 8% year-over-year growth, it has cut its 2023 EPS estimate to 3% growth from 6%. “Global and U.S. economic growth is weaker, the U.S. dollar is stronger, and inflation is higher than previously assumed in our top-down model. Economic growth is the main driver of growth in the “EPS and our economists now forecast that US real GDP growth will average +1.1% in 2023 (compared to the previous estimate of +1.6%),” Kostin wrote in a note It also expects net profit margins to widen 9 basis points in 2022 before falling 25 basis points in 2023. “We expect margin contraction in 2023 across all sectors, led by Materials, Energy and Healthcare,” Kostin wrote. With that in mind, Kostin identified dozens of companies that are vulnerable to downward EPS revisions given their recent margin trajectory. The names reported a decline in four-quarter net profit margins in the second quarter from the first quarter of 2022. However, the consensus expects them to expand margins over the next 12 months, he said. “A re-acceleration in profitability will be challenging given the macro backdrop of slowing economic growth (and possible recession) and high, albeit declining, inflation,” Kostin wrote. Here are 10 of the names he thinks might be in trouble. Match Group is one of the companies that made the list. The stock has taken a hit this year, 46%. The dating app operator reported second-quarter revenue that missed estimates along with weaker-than-expected guidance. Kostin said Match Group’s margins fell 565 basis points from the first to the second quarter. However, analysts expect margins to grow 1,623 basis points from Q2 2022 to Q2 2023. Whirlpool also made the list. On Monday, the company announced it would acquire Emerson’s food waste disposal business InSinkErator for $3 billion. The home appliance company is down more than 28% year-to-date, despite recently reporting second-quarter results that beat expectations. Whirlpool’s margins fell 438 basis points between the first and second quarters, but analysts still see an expansion of 264 basis points in the second quarter of 2023, Goldman data show. Another name that made the list is Yum Brands, which reported mixed results for the second quarter. The restaurant operator saw strong sales growth with Taco Bell, but lockdowns in China weighed on sales at Pizza Hut and KFC. Shares of Yum Brands are down 14% year to date. Yum’s margins declined 82 basis points in the second quarter from the first. However, analysts see margins growing by 118 basis points from the second quarter of 2022 to the second quarter of 2023. — CNBC’s Michael Bloom contributed to this report.
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