Analysis-Investors fear U.S. earnings forecast may be too high
By Caroline Valetkevitch
NEW YORK (Reuters) – Concerns are growing that U.S. corporate earnings are increasingly at risk from skyrocketing inflation, a strong dollar and rising interest rates, complicating the outlook for already reeling investors from the confirmation of the S&P 500 bear market earlier this week.
While second-quarter earnings growth forecasts have fallen in recent weeks, estimates for the third and fourth quarters and for 2022 as a whole have held steady or increased, according to IBES data from Refinitiv. On Friday, Wall Street analysts expected S&P 500 earnings to rise 9.6% in 2022, from 8.8% in early April and 8.4% on Jan. 1.
Strategists worry that those estimates probably won’t hold up. Many expect a more negative outlook from corporate America in the coming weeks and said the forecast will then be reflected in consensus earnings growth estimates.
Most S&P 500 companies will release their second-quarter results after mid-July, and software giant Microsoft and retailer Target have been among the companies to issue gloomy outlooks in recent weeks.
“The estimates are too high, and you’ll see them start to come down as the second quarter numbers come out and companies talk about what they’re seeing,” said Peter Tuz, president of Chase Investment Counsel.
Falling earnings expectations could spell more trouble for a market that has been rocked by worries about how an aggressive Federal Reserve response to soaring inflation could affect growth.
The S&P 500 ended Monday more than 20% below its closing high, confirming that the index is in a bear market, by a commonly used definition. The decline follows stronger-than-expected inflation data last week, which raised expectations about the degree to which the Fed will tighten monetary policy to rein in consumer prices.
The Fed raised rates by 75 basis points on Wednesday, its biggest increase since 1994 and has now raised borrowing costs by a total of 150 basis points this year.
Fears that corporate earnings are slipping could bolster the argument that equities remain highly valued, even after their steep decline this year. The S&P 500’s 12-month forward price-to-earnings ratio stood at 17.1 on Friday from 22.1 at the end of December, but remained above its long-term average of around 16, according to Refinitiv data.
Challenges facing U.S. companies include a stronger dollar, which was cited by Microsoft when the software maker cut its fourth-quarter profit and revenue forecast earlier this month. A stronger greenback typically eats into the profits of companies that have international operations and convert foreign currencies into dollars.
The US currency is up around 9% year-to-date and near a two-decade high against a basket of its peers, driven by expectations of higher US rates and heightened geopolitical tensions .
After Microsoft’s announcement, investors will listen to what other software and technology companies like Adobe Inc and IBM have to say about currency issues in upcoming reports, said Daniel Morgan, portfolio manager at Synovus Trust. . Adobe is due to release its second-quarter results after the bell on Thursday.
Also closely watched will be retailers and other consumer discretionary companies, which have struggled under the effects of soaring inflation. Shares of Walmart and other major retailers took a hit last week after Target slashed its quarterly profit margin forecast and said it would have to offer deeper discounts to eliminate inventory.
Other challenges include soaring oil prices and rising interest rates, which have weighed on technology and growth stocks, whose valuations are highly dependent on future cash flows. The recent COVID-related lockdowns in China could also have adverse consequences.
“We expect the energy crisis to hit growth and rising labor costs to eat away at earnings. The problem: Consensus earnings estimates don’t appear to reflect that,” analysts wrote. Blackrock in a recent note on why they “don’t buy the dip”. ” in action.
Certainly, while consumer spending is “changing,” it doesn’t seem to be slowing down, said Steve DeSanctis, small- and mid-cap equity strategist at Jefferies. This may suggest that some retailers could benefit from a change in consumer habits, even if others are feeling the effects.
At the same time, investors may already be pricing in expected earnings declines given the recent tumble in stocks, said Kristina Hooper, chief global market strategist at Invesco.
“The question is whether it’s happening so fast and so furiously that it further shakes market confidence,” she said.
(Reporting by Caroline Valetkevitch; Additional reporting by Sinead Carew in New York; Editing by Ira Iosebashvili and Lisa Shumaker)