Analysts reconsider income growth
• If stocks anticipate profits, investors clearly expect something big when companies start reporting results this week. The S& P 500 Index has climbed 3.6 per cent in a month, the best pre-earnings season in five years.
But Wall Street analysts have cut their estimates for S& P 500 income growth by more than half. At 3.6 per cent, they’re now predicting the biggest slowdown since 2011 after profits expanded about 11 per cent in the March-June quarter.
Yes, earnings are still increasing, and yes, a lot of the revision reflects the effect of hurricanes. But at minimum the buoyancy is a case study in the glass-half-full attitude that has marked investor sentiment for more than a year.
Add to that valuations that by some definitions exceed any but those at the top of the internet bubble, and you have a recipe for anxiety among fund managers.
“Suddenly, you are in a situation where you’re ignoring all the bad news, full speed ahead. Then a torpedo hits and you’re going to be blown up,” said Tom Mangan, senior vice- president of James Investment Research in Xenia, Ohio, which oversees about US$ 6 billion.
While analysts always l ower their expectations heading into earnings season, the 4.9 percentage-point reduction is almost double the average cut in the past year. All 11 industries suffered downward revisions, with financials and consumer discretionary seeing growth estimates going from positive to negative.
Insurers are likely to report a 41 per cent drop in profits as costs surged during the deadly storm season. Automakers and airlines may see income contracting more than nine per cent because of lost businesses during the natural disasters.
Investors are focused instead on the prospects of tax cuts in the U. S. and a global economic recovery, drivers that are expected to help prolong the profit cycle.
The S& P 500 rose 1. 2 per cent last week, hitting a sixth- consecutive record high before falling on the final day. At 19 times forecast earnings, the index trades near the highest valuation since the dot-com era.
Analysts expect a rebound starting in the fourth quarter, with earnings expanding at an average 11 per cent through June, data compiled by Bloomberg show.