Bloomberg— Strong U.S. corporate earnings may no longer be enough to sustain the stock market rally. Profit prospects are becoming increasingly important.
According to data collected by Bloomberg Intelligence, More than 79% of the more than 400 companies in the S&P 500 index that have reported earnings this season have exceeded earnings expectations. However, median stocks outperformed the index by less than 0.1% on earnings day, the smallest difference since late 2020.
This moderate reaction can be explained by one thing. Traders, unconvinced that companies can deliver going forward, are punishing stocks for the weaker-than-expected guidance.
Through April, 15% of S&P 500 companies that issued guidance beat estimates, the second-lowest reading since the pandemic, according to Bloomberg Intelligence data. There was a slight increase last week, with companies like Apple Inc. giving forecasts that beat estimates, helping push the percentage up to 18%, still low compared to history.
The 20% rally in the S&P 500 from late October through April had pushed the stock gauge to trade at 20 times projected earnings, 11% above its 10-year average. Traders are now looking for reasons to justify the high valuations and want to see more growth in the future.
“There is a substantial level of implicit optimism and, subsequently, a considerable margin of decline if disappointments arise”said Keith Buchanan, senior portfolio manager at GLOBALT Investments. “Guidance is vitally important this season,” given the high ratings, he added.
With U.S. economic growth falling to its lowest level in nearly two years in the latest quarter, inflation pressures persisting and uncertainty over interest rate cuts, the bar has been raised for corporate profit growth.
“You have to substitute something else if you’re not going to get those rate cuts,” said Quincy Krosby, global strategist at LPL Financial. “And it had to be the guide, because what else could there be?”
According to Bloomberg Intelligence, chipmakers are expected to grow about 40% in the second quarter, which would be the strongest rate among all industry groups. But even that wasn’t enough to keep the Nasdaq 100 index trading above its pre-earnings season level, as some of the biggest chipmakers warned of future profits.
Shares of Intel Corp. plunged after the largest maker of personal computer processors issued a weaker-than-anticipated second-quarter outlook. Shares of Advanced Micro Devices Inc. also fell after the company issued a disappointing forecast for its artificial intelligence processors.
As for other industries, consumer benchmark results still weeks away. But Morgan Stanley strategists led by Mike Wilson have cited increasingly cautious comments about low-income consumers in recent earnings reports from McDonald’s Corp. and Darden Restaurants Inc., which highlighted declines in visits from that category.
Starbucks Corp. said sales fell for the first time since 2020 as transactions declined in all regions during the quarter and the company lowered its annual revenue growth forecast to the low single digits.
“We’re certainly keeping an eye on the guidance, especially with some of the consumer-related companies, and it looks like the low-income consumer is under a bit of pressure”said Mona Mahajan, chief investment strategist at Edward Jones.
Investors will brace themselves for forecasts from America’s largest retailers, especially Walmart Inc. and Target Corp., when they report results later this month, as well as the latest reading on consumer sentiment next week.
“One of two things has to happen between now and the end of summer: either guidance improves dramatically or interest rates move lower,” said Matt Maley, chief market strategist at Miller Tabak + Co. “Otherwise, we could see another decline and probably a complete correction in the S&P 500.”
Read more at Bloomberg.com
