Investors looking for stocks that will post superior earnings growth in 2020 amid continuing concerns about global economic growth, even as trade war fears ease, have a rather small universe to consider, according to the October 2019 release of the U.S. Quarterly Chartbook from Goldman Sachs. Based on consensus estimates compiled by FactSet Research Systems, 57 of the 100 largest S&P 500 companies by market capitalization are projected to increase EPS by 10% or more in 2020.

Among those 57 stocks are these 7, with their year-to-date gains in 2019 through the close on Oct. 22, based on adjusted closing price data: Facebook Inc. (FB), 39.1%, Fiserv Inc. (FISV), 37.1%, MasterCard Inc. (MA), 39.3%, Nike Inc. (NKE), 30.0%, Northrop Grumman Corp. (NOC), 45.6%, Automatic Data Processing Inc. (ADP), 23.5%, and Microsoft Corp. (MSFT), 35.8%. By comparison, the S&P 500 is up by 19.5%.

Key Takeaways

  • Goldman Sachs looked at EPS growth projections for 2020.
  • They focused on large stocks with double-digit EPS growth forecasts.
  • Many of these stocks are expected to reverse 2019 earnings declines.

Significance for Investors

For the S&P 500 as a whole, the consensus estimates indicate that annual EPS growth will rebound from a mere 1% in 2019 to 10% in 2020. The sectors with the biggest projected EPS growth rates in 2020 are energy, 31%, materials, 19%, industrials, 16%, consumer discretionary, 12%, and information technology, 12%. Among those 57 stocks expected to deliver double-digit EPS increases in 2020, 14 of them, or slightly under 25%, are on track for EPS declines in 2019. The FactSet data used by Goldman was compiled as of Sept. 30.

Facebook. The social media giant is scheduled to report 3Q 2019 earnings after the market close on Oct. 30. Morgan Stanley analyst Brian Nowak expects 30% YOY growth in advertising revenue, beating the consensus estimate of 26%, Barron's reports. For 2020, while the consensus anticipates costs to rise by 35% to 45% in 2020, he believes that a range of 30% to 40% is just as likely. His price target is $235, or 28.9% above the Oct. 22 close.

The projections cited by Goldman indicate that a 16% decline in EPS for Facebook in 2019 is to be followed by a 49% surge in 2020. This is the fourth-best projected increase among the 100 largest S&P 500 stocks in the study.

Facebook has been the subject of probes by Congress and various U.S. regulatory agencies, raising concerns that the company might face huge fines, restrictions on its future growth, and maybe even a government-ordered breakup. In July 2019 Facebook agreed to pay a $5 billion fine to the U.S. Federal Trade Commission (FTC). Additionally, the FTC is investigating whether Facebook violated antitrust laws in its acquisitions of Instagram and WhatsApp, as detailed in a previous report.

Nonetheless, the widespread opinion among analysts is that the $5 billion fine allowed Facebook to put many of its regulatory troubles to rest. Facebook has a recommendation of buy or strong buy from 93% of the analysts covering it, with a consensus price target of $235.70, or 29.3% above the Oct. 22 close, as of that date.

Northrop Grumman. The aerospace company, a leading defense contractor, is slated to release 3Q 2019 earnings before the market open on Oct. 24. The projections cited by Goldman are that it will endure a 10% EPS decline in 2019, then a 14% rise in 2020.

"We remain constructive on defense stocks and believe they are a good place to be,” writes Rajeev Lalwani, an analyst with Morgan Stanley, as quoted by Barron's. “Northrop is the best way to play the long-term strategic priorities of the U.S. government,” he added. Lalwani set a price target of $418 on Northrop Grumman, or 18.6% above the Oct. 22 close. The current consensus is $388.50, implying a 10.3% gain.

Looking Ahead

The stocks on Goldman's list are subject to macro forces about which there remains significant uncertainty. These forces include developments in trade, the direction of the global and U.S. economies, and Federal Reserve policy. Dramatic shifts in the outlooks for these drivers can change the prospects for the stocks on Goldman's list, either to the upside or the downside.