S&P 500 Earnings Forecast to Tumble

Pessimism on U.S. large-cap earnings is not priced in

Pessimism on U.S. large-cap earnings is not priced in

As another year of ‘tape bomb’-driven stock market moves beds down into its final stretch, it’s easy to temporarily forget an arguably more important influence for equity prices: company earnings.

Well, even after risk aversion appeared to make a return in recent sessions, the S&P 500 was still less than 2% below its 2019 high at last check. Strong earnings were not the force that propelled the market to these levels - though appearances can be deceptive. Almost all of the benchmark index’s constituents have reported Q2 earnings by now, and around 74% beat analysts estimates. Lowered estimates, that is. Those estimates were down 11% compared to September last year till July this year.

Nor is there much of an expectation that large-cap corporate profits will rebound in coming quarters. The graphic below shows pessimism building after S&P 500 profits peaked in the third quarter of last year. It’s been downhill ever since, and according to analyst forecasts, the worst is yet to come.

S&P 500 revenue, net income, earnings estimates/actuals – Q2 2016 – Q1 2021

Source: Refinitiv/City Index

Investors weren’t always this pessimistic about recent and current quarters. Breaking out estimates of this year’s performance by S&P 500 companies, it’s fairly clear that a forecast ramp coincided with the advent of Washington’s huge tax cuts late in 2017. The sugar high didn’t last though. Worries about the trade conflict may even be impacting assessments of how major U.S. firms may fare as far out as 2021.

Aggregate S&P 500 profit estimates for 2019, 2020, 2021 – December 2017 – September 2019

Source: Bloomberg/City Index

The main saving grace for forthcoming earnings? A long-standing pattern for U.S. earnings to mostly beat estimates overall. Over the past 10 years about 70% of S&P 500 members have topped quarterly consensus estimates. In 2019, an aggregate 4% decline in first-quarter EPS was expected. Actual results showed 1% growth.

That said, whilst better-than-expected earnings are obviously preferable to the opposite, the relationship between earnings beats and stock market gains is far from direct historically. With the U.S.-China trade conflict unresolved and the S&P 500 trading 19% higher in 2019, the risk that the dispute fails to improve does not look priced in. Weak earnings forecasts are also out of whack with the market’s advance. U.S. stock market gains clearly reflect expected monetary policy support, though even that looks less certain after last week’s more hawkish than expected Fed statement. So, if U.S. equities need to fall back on earnings performance for stability, they are just likely to keep falling.

Chart thoughts

The S&P 500 continues to struggle below a broken optimistic rising trend line that can be traced back to the bottom of the winter 2018 correction. The notion of support is palpably invalidated, but the idea of resistance is compelling. Since the market fell back below the line in recent sessions, attempts to mount it have failed. That said, SPX’s busy—albeit volatile—consolidation mostly between early August and early this month has likely laid down some support. Consider the Monday 5th August low of 2822 following the high of Friday at the end of the previous week, 2945. Note that SPX didn’t emerge from that range till the big gap higher on 5th September. As the index appears magnetically drawn back to that range—which is in confluence with a nearby 38.2% retracement—buyers can take comfort that this region won’t give way without a fight.

S&P 500 – Daily 25/09/2019 19:44:02

Source: Bloomberg/City Index


This report is intended for general circulation only. It should not be construed as a recommendation, or an offer (or solicitation of an offer) to buy or sell any financial products. The information provided does not take into account your specific investment objectives, financial situation or particular needs. Before you act on any recommendation that may be contained in this report, independent advice ought to be sought from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs.

StoneX Financial Pte. Ltd., may distribute reports produced by its respective foreign entities or affiliates within the StoneX group of companies or third parties pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed to a person in Singapore who is not an accredited investor, expert investor or an institutional investor (as defined in the Securities Futures Act), StoneX Financial Pte. Ltd. accepts legal responsibility to such persons for the contents of the report only to the extent required by law. Singapore recipients should contact StoneX Financial Pte. Ltd. at 6826 9988 for matters arising from, or in connection with the report.

In the case of all other recipients of this report, to the extent permitted by applicable laws and regulations neither StoneX Financial Pte. Ltd. nor its associated companies will be responsible or liable for any loss or damage incurred arising out of, or in connection with, any use of the information contained in this report and all such liability is hereby expressly disclaimed. No representation or warranty is made, express or implied, that the content of this report is complete or accurate.

StoneX Financial Pte. Ltd. is not under any obligation to update this report.

Trading CFDs and FX on margin carries a high level of risk that may not be suitable for some investors. Consider your investment objectives, level of experience, financial resources, risk appetite and other relevant circumstances carefully. The possibility exists that you could lose some or all of your investments, including your initial deposits. If in doubt, please seek independent expert advice. Visit cityindex.com.sg for the complete Risk Disclosure Statement.