Both sales growth and tax reform contributed equally to first half EPS growth as revenues during the first two quarters rose by more than 10%, led by Energy (+108%) and Materials (+45%), according to Goldman. Meanwhile, Trump's tax reform and the lower corporate tax rate accounted for 10% of earnings growth (excluding lower tax rates, EPS growth would have been 15% in 1Q and 17% in 2Q, still the fastest pace since 2011).

Commenting on what to expect during Q3 earnings season in his latest Weekly Kickstart note, Goldman's David Kostin writes that the recent trend of double-digit revenue growth will continue with 11% sales growth in 3Q 2018.

Consensus expects that Energy (+31%) and Health Care (+19%) will provide the fastest sales growth at the sector level. Energy sales directly benefit from the rally in crude. WTI averaged $69 per barrel in 3Q, up 44% vs. last year. Information Technology is expected to grow 3Q revenues by a more modest 12% primarily due to the reclassification of GOOGL (consensus sales growth +23%) and FB (+34%) into Communications Services.

While Kostin notes that a key catalyst behind the upside surprise in first half earnings was the 200bps impact on EPS which was underestimated by Wall Street (and could represent a source of positive EPS surprise in 3Q), he notes that the ultimate driver of corporate sales growth is underlying economic activity.

As Fed Chair Powell stated in his speech this week to the National Association for Business Economics (NABE), the outlook is “remarkably positive.” In fact, the unemployment rate released this morning fell to 3.7%, the lowest level in 50 years. The National Federation of Independent Businesses (NFIB) survey stands at 108.8, the highest reading since the survey began 44 years ago. ISM non-manufacturing survey hit 61.6 this week, the highest level since the measure started in 1997.

And yet, as we gradually anniversary the base effect of tax cuts by the end of the year - at which point they will provide no new upside to earnings growth - a trio of new threats is emerging, all of which threaten to pull down profit margins in the coming year.

Kostin first previewed this danger last week, when he warned that the boost from tax reform will fade some time over the next 2 quarters, which will ratchet up pressure on corporate margins and most companies will suffer margin erosion as trade war ramps up. Meanwhile, firms with the ability to maintain or expand profit margins will become increasingly scarce and will likely be rewarded by investors. This is why Kostin introduced a list of 33 Russell 1000 companies with high and stable gross margins, which the Goldman strategist said would provide resilient to margin contraction as trade war escalated: