More pessimism in profit targets
The evidence is mounting: U.S. companies are growing less confident that they will be able to hit analyst profit targets.
Looking at forecasts issued by S&P 500 members last month, Bank of America found that more than two times as many projections were below the Wall Street consensus than above. It’s the most shortfalls in 2½ years.
While it’s not unusual for companies to predict profits won’t match expectations — the longterm average is 1.5 below for every 1 above, according to the bank — the spike in pessimism among firms could prompt analysts to follow suit, pressuring stock prices ahead of the thirdquarter earnings period that starts Friday.
“When we look at what corporates are saying, which tends to lead estimate revisions, the guidance ratio is still above average but it’s been coming down,” said Jill Carey Hall, equity strategist at the bank’s Merrill Lynch unit.
“This is one data point that’s something to watch going forward,” she said.
Analysts — Wall Street’s most reliable bulls — keep raising profit estimates even as executives from Netflix to Applied Materials warn that the effects of rising interest rates and the Trump administration’s global trade war may crimp margins. For investors accustomed to results soaring past estimates, disappointment can be costly.
That’s not to say companies have grown flatout bearish on earnings. Guidance remains “more optimistic than usual,” Bank of America said, and the weak forecasts from last month came from only a score of companies, lower than in most months. Still, the move to lower expectations among investors heading into this period is a change this year.
“Unlike in the last quarter going into the earnings season, the earnings estimates on Wall Street were rising and this one, it’s coming down a little bit,” said Jim Paulsen, chief investment strategist at Leuthold Weeden Capital Management. “That’s different.”
Companies are expected to earn $42.11 a share in the JuneSeptember period, a quarterly record.
Citigroup and Wells Fargo report results Friday, before Netflix and eBay step up the following week.
Investors are likely to look for “more color on tariffs” during upcoming earnings calls, to better assess the impact trade issues will have on profit margins, Hall said.
“Now that we’ve seen more tariffs put in place, we will be paying attention to that,” she said. “And if any other uncertainties have crept in, as well as if there’s evidence of wage pressures building further, which can impact margins.”