More businesses that have provided guidance for the upcoming quarter and beyond this earnings season have done so with forecasts that fall short of analysts’ projections. According to statistics published by Bloomberg Intelligence, a measure of forward guidance that contrasts company projections with the Wall Street consensus has only decreased once since 2019.
Upon seeing that, the bulls in stocks may assume that the C-Suite signals will prove to be too cautious, paving the way for ultimate market exultation. However, the more pessimistic view is that businesses are subtly becoming more cautious as they deal with a worrisome global outlook and the demand challenges brought on by the Federal Reserve’s relentless interest rate hikes.
It doesn’t look good for stock prices if there is a lot of confidence based on expectations that are abruptly turned around, according to EP Wealth Advisors managing director of portfolio management Adam Phillips. However, there are increasing indications now that the tighter financial circumstances and profit outlooks are starting to show cracks. A few experts have taken longer to accept this.
Only around 25% of S&P 500 companies—typically those in the technology and discretionary sectors—offer quarterly guidance, and slightly more than half do so annually. Although the outlook has darkened along with generally higher borrowing prices, the majority of Big Tech companies have reported earnings that are either on par with or beyond estimates.
This week, the S&P 500 has increased 5.9% as Treasury rates have fallen and predictions that the Fed is done tightening have been reinforced by Friday’s weaker-than-expected US employment data.
According to data from Bloomberg Intelligence, the momentum indicator for earnings guidance, which is partly based on the ratio of raised against decreased expectations, is currently at its lowest point since the first quarter and, away from that time, the lowest since 2019.
The negative indication shows that the profit growth that investors were counting on would not happen as quickly as anticipated. According to BI, the S&P 500 is on track to end a three-quarter skid of declining profits and report third-quarter earnings increase of 3.2%.
Businesses have many reasons to be cautious, such as the ongoing conflict in the Middle East, the persistence of inflation, and the uncertainty surrounding the state of the economy. According to the Atlanta Fed’s GDPNow model, real GDP growth in the fourth quarter will accelerate to an annual rate of 1.2% from a 4.9% clip in the three months leading up to September.
Sell-side pundits are paying attention. According to statistics gathered by Deutsche Bank AG, they have reduced their fourth-quarter EPS projections by 1.9% since October 6. According to Deutsche Bank statistics dating back to 2010, thus late into the results season, the perspective on the next reporting cycle has historically witnessed a 1% median reduction.
According to Justin Burgin, director of equities research at Ameriprise Financial, a lacklustre response to third-quarter profits is mostly due to low trust in firms’ profit forecasts.
A day following the results, the S&P 500 companies that failed to meet analysts’ profit projections underperformed the benchmark by 3.8% on average, which is the worst performance in a year, according to BI.