Market Extra: Stock market may be in for a rude awakening as profits dry up, warns strategist

This post was originally published on this site

Blockbuster earnings, which up until now have played a pivotal role in fueling the stock market’s rally over the past few years, could be a distant memory as corporate profits hit a wall.

Mike Wilson, chief equity strategist at Morgan Stanley, on Monday downgraded S&P 500’s earnings-per-share growth target for the year to 1% from 4.3% and warned of a looming earnings recession.

“Our earnings recession call is playing out even faster than we expected,” said Wilson in a Monday report. “When we made our call for a greater than 50% chance of an earnings recession this year, we thought it might take a bit longer for the evidence to build.”

The strategist, whose views on the stock market are among the more subdued in the industry, believes the odds of a contraction in corporation’s bottom line are rising with the possibility of flat earnings in the first half and a “hockey stick” for the second half, he added.

One doesn’t have to look far for clues on where the corporate sector’s performance is headed. Fourth-quarter earnings season, which is in the process of winding down, alone attests to the strategist’s lukewarm outlook.

As of Feb. 8, with 66% of S&P 500 SPX, +0.06%  components having announced results, fourth-quarter earnings rose 13.3%. If this holds, it will be the first quarter that the index has not posted an increase of 20%, according to John Butters, senior earnings analyst at FactSet Research.

For the current quarter, U.S. companies are projected to report an earnings contraction of 4.1%, based on analysts’ median estimates in January. That is significantly deeper than the average 1.7% decline over the past 15 years, Butters said.

Things could improve toward the latter part of 2019 with analysts predicting earnings growth to accelerate to about 9.5% in the fourth quarter versus roughly 1% over most of the year.

But Wilson is urging investors not to buy too much into the “inflection” given that the recovery is not a sure bet.

“We have seen this kind of inflection happen a few times, but these inflections were all related to 1) comping against negative or slower EPS growth or 2) tax cuts mechanically lifting the growth rate. Neither of those force are at play this year. In fact, it’s the opposite making the achievability of these estimates even more unlikely,” he said.

The strategist actually took it further and suggested that investors should brace more downward revisions, higher volatility and increased pressure on returns.

“If current estimates move in line with history, we could see a full year decline of about 3.5% in S&P earnings,” said Wilson.

Still, the strategist kept his S&P 500 price target at 2,750 for the moment, stressing that the market’s returns can still remain positive on the back of the Federal Reserve’s dovish bias.

The Federal Open Market Committee unanimously kept key interest rates unchanged at a range of 2.25% to 2.50% at its January meeting, as widely expected. It also stressed that it will be “patient” and went as far as to suggest that it may curtail trimming its balance sheet if needed.

The central bank’s retreat from its earlier hawkish stance has helped to shield stocks from the worst of the U.S. and China’s trade spat and the political gridlock over the spending bill which could lead to another government shutdown next week.

The S&P 500 is up 8%, while the Dow Jones Industrial Average DJIA, -0.21%   gained 7.5% and the Nasdaq COMP, +0.13%   rallied 10.2% so far this year.

Providing critical information for the U.S. trading day. Subscribe to MarketWatch's free Need to Know newsletter. Sign up here.

Be Sociable, Share!

Related Posts

 

MarketTamer is not an investment advisor and is not registered with the U.S. Securities and Exchange Commission or the Financial Industry Regulatory Authority. Further, owners, employees, agents or representatives of MarketTamer are not acting as investment advisors and might not be registered with the U.S. Securities and Exchange Commission or the Financial Industry Regulatory.


This company makes no representations or warranties concerning the products, practices or procedures of any company or entity mentioned or recommended in this email, and makes no representations or warranties concerning said company or entity’s compliance with applicable laws and regulations, including, but not limited to, regulations promulgated by the SEC or the CFTC. The sender of this email may receive a portion of the proceeds from the sale of any products or services offered by a company or entity mentioned or recommended in this email. The recipient of this email assumes responsibility for conducting its own due diligence on the aforementioned company or entity and assumes full responsibility, and releases the sender from liability, for any purchase or order made from any company or entity mentioned or recommended in this email.


The content on any of MarketTamer websites, products or communication is for educational purposes only. Nothing in its products, services, or communications shall be construed as a solicitation and/or recommendation to buy or sell a security. Trading stocks, options and other securities involves risk. The risk of loss in trading securities can be substantial. The risk involved with trading stocks, options and other securities is not suitable for all investors. Prior to buying or selling an option, an investor must evaluate his/her own personal financial situation and consider all relevant risk factors. See: Characteristics and Risks of Standardized Options. The www.MarketTamer.com educational training program and software services are provided to improve financial understanding.


The information presented in this site is not intended to be used as the sole basis of any investment decisions, nor should it be construed as advice designed to meet the investment needs of any particular investor. Nothing in our research constitutes legal, accounting or tax advice or individually tailored investment advice. Our research is prepared for general circulation and has been prepared without regard to the individual financial circumstances and objectives of persons who receive or obtain access to it. Our research is based on sources that we believe to be reliable. However, we do not make any representation or warranty, expressed or implied, as to the accuracy of our research, the completeness, or correctness or make any guarantee or other promise as to any results that may be obtained from using our research. To the maximum extent permitted by law, neither we, any of our affiliates, nor any other person, shall have any liability whatsoever to any person for any loss or expense, whether direct, indirect, consequential, incidental or otherwise, arising from or relating in any way to any use of or reliance on our research or the information contained therein. Some discussions contain forward looking statements which are based on current expectations and differences can be expected. All of our research, including the estimates, opinions and information contained therein, reflects our judgment as of the publication or other dissemination date of the research and is subject to change without notice. Further, we expressly disclaim any responsibility to update such research. Investing involves substantial risk. Past performance is not a guarantee of future results, and a loss of original capital may occur. No one receiving or accessing our research should make any investment decision without first consulting his or her own personal financial advisor and conducting his or her own research and due diligence, including carefully reviewing any applicable prospectuses, press releases, reports and other public filings of the issuer of any securities being considered. None of the information presented should be construed as an offer to sell or buy any particular security. As always, use your best judgment when investing.