Investors should brace for corporate profits to see their biggest drop since the start of the pandemic, Goldman Sachs says

Friday's inflation print shocked investors.

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• Goldman Sachs strategists say they expect corporate profits to see their steepest decline since 2020.

• There are only three sectors they expect to have seen expanded profit margins last quarter. 
• The vast majority of other industries will likely see their margins drop by over 200 basis points.

As markets head into first-quarter earnings season, Goldman Sachs strategists say corporate profits are set for their steepest decline since the start of the COVID-19 pandemic in 2020.

Earnings per share are expected to decline 7% year-over-year, according to a note from the bank published this week, along with a "significant deterioration" from the -1% year-over-year growth posted in the last three months of 2022. 

"However, if analyst projections are realized, this quarter will represent the trough in S&P 500 earnings growth.  Materials (-32%) and Health Care (-20%) are expected to report the largest earnings declines," the note reads. "Communication Services (-18%) and Info Tech (-16%) stocks are also expected to announce dramatic EPS declines despite recent surging share prices of some of these sectors' largest constituents."

There are only three industries that are forecasted to post expanded margins in the last quarter. Energy and industrials are expected to report year-over-year EPS growth of more than 11%, while consumer discretionary is expected to rise over 9% for the same time frame.

"With margins projected to contract by a greater amount than in any other quarter since the pandemic, investors will focus on which companies manage to preserve margins and by what means," the analysts wrote. 

The majority of other sectors will likely see their margins come down by over 200 basis points.

There's a "unique level of uncertainty heading into earnings season," because of the string of last month's bank failures, analysts said. The full impact of the banking sector's turmoil won't be reflected in the upcoming earnings reports as the turmoil struck late in the quarter, but "uncertainty is elevated and investors will be focused on the path forward."

Financial sector giants like Citigroup and JPMorgan will kick off earnings season next week, with 87% of S&P 500 to report first-quarter fiscal results by May 5th.

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