Souring S&P 500 Profit Outlook a Bad Sign for Stock Market Rally

(Bloomberg) — Wall Street analysts are quickly scaling back their forecasts for Corporate America’s earnings growth over the subsequent yr, which could pump the brakes on the blistering stock market rally before long.

Most Read from Bloomberg

A key indicator often known as earnings-revision momentum — a gauge of upward-to-downward changes to expected per-share earnings over the subsequent 12 months for the S&P 500 — has slumped into negative territory and is hovering near its second-worst reading prior to now yr, in line with data compiled by Bloomberg Intelligence.

Hearken to the Here’s Why podcast on Apple, Spotify or anywhere you listen

Corporate earnings have been the cornerstone of the stock market’s rally for many of the past decade. Souring outlook on profit growth may dent an extra S&P 500 advance after this yr’s run made valuations stretched and positioning elevated. The benchmark has been on course for its second consecutive yr of gains, rising greater than 20%, and is at its costliest level since April 2021.

Stocks are being “arrange for a reversal,” said Gina Martin Adams, chief equity strategist at BI. “The large issue heading into 2025 is whether or not the Fed will have the opportunity to proceed easing policy and if earnings momentum will favor laggards outside of Big Tech.”

In fact, analysts still expect the S&P 500 to deliver its second-best period of profit growth since early 2022 within the third quarter as earnings broaden beyond Big Tech, BI data show. With roughly 90% of corporations within the index having already reported, S&P 500 profits are projected to climb by 8.5% through September from a yr ago, double the 4.2% estimate at the beginning of earnings season.

While profits are expected to grow for a fifth-straight quarter, analysts have marked down EPS estimates for the subsequent 12 months after executives delivered mixed outlooks or held back on offering guidance amid uncertainty over Federal Reserve interest-rates cuts, weakness in China’s economy and questions on fiscal policy in Washington.

Even before Donald Trump’s presidential election win, earnings-revision breadth for the S&P 500 was hovering near neutral for the past several months. Corporations were “uncertain on 2024 outcomes and have been reluctant to guide further on 2025,” strategists led by Mike Wilson at Morgan Stanley wrote in a note to clients.

The earnings outlook for all of 2025 has barely budged whilst analysts have raised third-quarter estimates. Wall Street sees S&P 500 corporations earning around $274 per share next yr, barely below projections of roughly $277 a yr ago, in line with data compiled by BI.

“As we approach the start of the brand new yr, you are inclined to see a bias to more realistic expectations,” said Matt Lloyd, chief investment strategist at Advisors Asset Management. “Combined with Fed comments about not seeing a transparent rate-cut path, the headwinds change into more realistic.”

Since mid-October, analysts have lowered year-ahead projections by essentially the most for energy and materials corporations as crude prices slump, BI data show. Excluding energy, which skewed estimates attributable to lower commodity prices and ebbing inflation, S&P 500 earnings are forecast to grow by about 11% year-over-year within the third quarter.

All told, S&P 500 profit growth is forecast to climb 15% annually in 2025, up from estimates of 8% this yr. The issue, though, is that the index’s earnings recession that concluded last yr was long but relatively shallow, which could open the door to a smaller profit expansion than stock bulls hope in the approaching years.

From peak to trough, the S&P 500 posted a 13% EPS contraction for its three-quarter earnings recession that ended last yr, when viewed on a trailing 12-month basis, data compiled by BI show. That’s well in need of the median 26% peak-to-trough drop because the late Sixties.

Corporations might want to post sturdy profit growth and robust outlooks for next yr to sustain and justify wealthy valuations which have propelled the S&P 500 above the 6,000 milestone in recent months. At 22 times future 12-month earnings estimates, the index’s valuation is well above its long-term average of 18.4 over the past decade.

“Fewer rate cuts might put pressure on what are otherwise lofty earnings expectations over the subsequent several quarters,” said Adam Phillips, managing director of portfolio strategy at EP Wealth Advisors.

Finapress

Souring S&P 500 Profit Outlook a Bad Sign for Stock Market Rally

Leave a Comment Cancel Reply