S&P 500's EPS to jump 35% in 2021 on economy reopening – Goldman Sachs

After S&P 500 companies more than doubled analyst earnings expectations in the first quarter, Goldman Sachs has raised its earnings-per-share forecast for 2021 to 35% growth over 2020.

"The combination of global reopening, elevated consumer savings, and strong corporate operating leverage will drive sharp recoveries in both economic and earnings growth," a team led by David Kostin, Goldman's chief U.S. market strategist, wrote in a May 14 note.

Kostin's team sees S&P 500 EPS climbing from $142 in 2020 to $193 in 2021, up by $12 from its previous forecast. Goldman strategists forecast S&P 500 EPS climbing to $202 in 2022, up by $5 from its previous forecast.

S&P 500 companies have reported first-quarter earnings up 46% from the first quarter of 2020, according to Goldman's analysis. Equity analysts had expected growth of about 20%. As of May 14, 90% of S&P 500 companies had reported earnings for the first quarter of 2021.

Goldman's 2022 EPS estimates, while higher, are relatively low due to forecast cost increases from President Joe Biden's Biden tax plan. Kostin's team estimates the proposal, which would require approval from Congress, will increase the corporate tax rate from 21% to 25% and increase the tax rate on foreign income.

"Both our investor conversations and the performance of our tax baskets suggest portfolio managers have not incorporated higher taxes into their forecasts, meaning negative revisions to 2022 EPS are likely later in the year," Kostin's team wrote.

Goldman strategists see the S&P 500 climbing to 4,300 in the next three months, up about 3.5% from where it was trading May 17, and to 4,500 within a year, up about 8.3%.

"U.S. equities will continue to appreciate, albeit at a slower pace than has characterized the past 12 months," Kostin's team wrote. "Nonetheless, equities will remain attractive relative to cash and bonds."

Large-cap stocks will be bolstered by rising U.S. GDP and a weaker dollar, which should support revenues, Kostin's team wrote.