Stock bulls limp into results period
CFOS CUTTING PROFIT FORECASTS AT A RATE NOT SEEN IN THREE YEARS
With headlines on trade and impeachment whipsawing equities, corporate fundamentals have gotten short shrift of late. That will, at least briefly, come to an end next month, when earnings season begins anew.
But investors hoping that a shift in focus will help soothe their frayed nerves might be in for a big disappointment. CFOs have been cutting their profit forecasts at a rate not seen in three years. Moreover, a consensus is growing among analysts that companies’ predictions for next year remain too high. For a market struggling to reclaim record highs amid trade tensions and political drama, signs of profit deterioration could blowup the bull case.
“Expectations have to come down,” Susan Schmidt, head of US equities at Aviva Investors, which manages $440 billion, said. “This is a gradual deflation of the bubble and it’s a question of how much is priced in.”
Going by the market’s recent track record during earnings, there’s cause for concern even if profits meet expectations. The S&P 500 fell in three of the last four reporting periods, with losses averaging 2.9 per cent over the six-week span. That’s a turnaround from the previous six years, when the market climbed when profits were in focus in all but three instances.
As it stands, S&P 500 companies are set to report a contraction in earnings of 3 per cent, a figure that should turn into a modest gain if historical beat rates hold. But finance chiefs have issued more cuts than usual, with roughly half of the 91 revisions in the past three months being lower, the highest proportion in over three years.
Trade war
Weak earnings could be devastating for a market buffeted by trade turmoil and, newly, political drama over impeachment. The S&P 500 fell 1 per cent in the past five days, capping a second weekly loss and trimming the quarterly advance to 0.7 per cent.
The latest batch of warnings has cut across sectors. US Steel Corp lowered its forecast last week, prompting analysts to downgrade the stock or cut price targets. Adobe Inc projected slower sales growth for the current period, and FedEx Corp, seen as an economic bellwether, cut its profit outlook due to “increasing trade tensions and policy uncertainty.”