Despite the stock market’s strong performance this week, there are growing fears about the earnings outlook for American companies. A significant number of companies offering guidance for the next quarter and beyond have offered estimates that are below analyst expectations. This has led to a forward guidance indicator, which compares corporate forecasts to the Wall Street consensus, reaching its second lowest point since 2019. While some remain optimistic, attributing this to possible conservatism in signals from senior management, a more sombre interpretation suggests that companies are moving forward cautiously in light of a challenging global outlook and the headwinds generated by the assertive interest rate hikes from the Federal Reserve.
In a week that saw strong stock market performance, concerns have been raised regarding the earnings outlook for U.S. companies. A notable trend this earnings season has been the growing number of companies offering guidance for the next quarter and beyond that falls short of analyst projections. Data compiled by Bloomberg Intelligence reveals that a future guidance indicator, which compares corporate forecasts with the Wall Street consensus, has hit its second lowest point since 2019.
While some optimists may view this cautiously, speculating that signals from top management could ultimately prove too conservative, a more somber interpretation suggests that companies are taking a cautious approach as they grapple with a global economic outlook that is raising concerns, compounded by the resistance posed by the Federal Reserve’s aggressive interest rate increases.
Adam Phillips, managing director of portfolio strategy at EP Wealth Advisors, emphasizes the potential repercussions: “If there is a lot of optimism based on forward-looking projections and suddenly that starts to change, then it doesn’t bode well for share prices. But we are seeing more signs that cracks are starting to form from tighter financial conditions and earnings prospects. Some analysts They have been slower to accept this.”
About only a quarter of S&P 500 companies provide quarterly guidance, and just over half provide it annually, primarily in the technology and discretionary sectors. While earnings for most big tech companies have met or exceeded expectations, the outlook has dimmed along with overall rising borrowing costs.
The S&P 500 posted a notable 5.9% gain this week, driven in part by weaker-than-expected U.S. jobs data. This development reinforced confidence that the Federal Reserve may have concluded its tightening measures, leading to a significant drop in Treasury yields.
The gauge measuring momentum in earnings guidance, derived from factors such as the ratio of raised to reduced guidance, is currently at its lowest level since the first quarter. With the exception of that period, it is the lowest since 2019, according to data from Bloomberg Intelligence.
This bearish signal implies that the expected earnings expansion may not materialize as quickly as initially anticipated. The S&P 500 is currently expected to post 3.2% earnings growth in the third quarter, marking the end of a three-quarter streak of earnings contraction.
Several factors contribute to corporate caution, ranging from geopolitical tensions in the Middle East to persistent inflation and a lack of economic clarity. The Atlanta Fed’s GDPNow model forecasts a slowdown in real GDP growth in the fourth quarter to an annual rate of 1.2%, down from the 4.9% pace in the previous three months.
Sell-side analysts have taken note of this trend and reduced their fourth-quarter earnings per share estimates by 1.9% since October 6, Deutsche Bank AG reported. This is a departure from the typical pattern, whereby the outlook for the next reporting cycle tends to see an average decline of 1%, according to Deutsche Bank data going back to 2010.
Justin Burgin, director of equity research at Ameriprise Financial, says waning confidence in companies’ earnings prospects is the main factor behind the lackluster response to third-quarter earnings. S&P 500 companies that missed analysts’ earnings estimates underperformed the benchmark index by an average of 3.8% a day after the results, marking the weakest performance in a year, according to Bloomberg Intelligence.
Also read: Stock Market Optimism as Fed Hints at Pause on Rate Hikes