How can you approach the upcoming earnings season? Goldman suggests considering options trading.

Goldman Sachs Predicts Greater Earnings Volatility Than Wall Street Expects

According to Goldman Sachs, the upcoming fourth-quarter earnings season could bring more dramatic market swings than investors currently anticipate.

Main Insights

• Goldman Sachs strategists believe that the volatility following earnings announcements will surpass what is currently reflected in options pricing.
• They suggest that options traders may be underestimating the potential for positive surprises from companies such as Meta, UnitedHealth Group, and Robinhood, which are expected to outperform earnings forecasts.
• Conversely, stocks like Southwest Airlines and Texas Instruments could see sharper declines than traders are predicting after their earnings reports.

With earnings season fast approaching, Goldman Sachs analysts are sharing their perspectives on how to navigate the market during this period.

Based on options market data, traders are pricing in an average move of 4.5%—either up or down—for S&P 500 stocks after earnings releases. This is near the lowest implied volatility seen in the past two decades, according to Goldman. In contrast, just two quarters ago, the average move was 5.4%, marking the highest volatility since 2009.

Goldman’s analysts attribute this difference to expectations for a calmer earnings season. However, they caution that the underlying factors driving earnings volatility are still present.

Why It’s Important

Earnings reports often trigger significant stock price movements, which can either reinforce or challenge investor confidence in a company. Investors may use options strategies to manage the cost of adjusting their positions after earnings are announced.

Goldman Sachs sees the greatest potential for post-earnings volatility in sectors such as utilities, healthcare, materials, and industrials. Notably, utilities have experienced unusually high volatility in recent quarters, while most other sectors—including technology—have seen volatility decrease over the past year.

The firm is optimistic about the upcoming earnings season, expecting more positive surprises than negative ones. Over the past three months, Goldman’s S&P 500 earnings projections have increased by 5%, and their price target for the index has risen by 8%. However, the index itself has only gained 3%, indicating that improvements in company fundamentals have outpaced stock price growth.

During this period, individual investors have been active buyers of both individual stocks and ETFs, which Goldman analysts view as a positive sign for future equity performance.

To highlight the most promising opportunities for the upcoming earnings season, Goldman Sachs has identified 25 stocks where their earnings outlook differs significantly from the consensus. These are the companies where they see the greatest potential for investors to benefit from options trading strategies.

Goldman’s advice: “Consider buying single stock options to take advantage of anticipated earnings-day volatility this quarter.”

Stocks Poised for Earnings Surprises

Among the companies Goldman expects to deliver stronger-than-anticipated results are Meta Platforms (META), UnitedHealth Group (UNH), Arista Networks (ANET), and Robinhood (HOOD). Investors might benefit from purchasing out-of-the-money call options on these stocks if earnings come in as strong as Goldman predicts.

On the other hand, Goldman anticipates that Texas Instruments (TXN) and Southwest Airlines (LUV) could face margin pressures that negatively impact their share prices this earnings season. In such cases, traders could potentially profit by purchasing slightly out-of-the-money put options.