Robust earnings results from Corporate America may no longer suffice to sustain the stock market rally. The focus is now shifting towards profit outlooks, which are gaining more significance.
With over 400 companies in the S&P 500 Index having disclosed their earnings this season, an impressive 79% have surpassed profit projections, as per data from Bloomberg Intelligence.
However, the median stock only outperformed the index marginally by less than 0.1% on the day of reporting, marking the smallest difference since late 2020.
The subdued market response can be attributed to one key factor: traders are skeptical about companies’ ability to deliver in the future and are penalizing stocks for weaker-than-expected guidance.
Of the S&P 500 firms that provided guidance through April, only 15% offered an outlook that exceeded estimates, the second-lowest figure since the onset of the pandemic, according to Bloomberg Intelligence data.
Although there was a slight uptick in the latest week, with companies like Apple Inc. offering forecasts that surpassed expectations, the percentage remains low compared to historical levels.
The recent rally in the S&P 500, climbing 20% since the end of October through April, had propelled the equity gauge to trade at 20 times projected earnings, approximately 11% above its 10-year average.
Traders now seek justification for these high valuations and are eager to witness substantial growth prospects ahead.
Keith Buchanan, senior portfolio manager at GLOBALT Investments, remarked, “There’s a substantive level of optimism baked in, and subsequently, considerable downside if disappointments arise.” He emphasized the critical importance of guidance this season, given the increased valuations.
Quincy Krosby, chief global strategist at LPL Financial, noted, “You have to substitute something else if you’re not going to get those rate cuts… And it had to be guidance because what else is there going to be?”
While chipmakers are anticipated to register roughly 40% growth in the second quarter, marking the strongest rate among all industry groups, this wasn’t adequate to sustain the Nasdaq 100 Index above its pre-earnings season level.
Intel Corp. and Advanced Micro Devices Inc. both experienced share declines after issuing weaker-than-expected forecasts.
In other sectors, consumer-centric industries are still awaiting results. Morgan Stanley strategists highlighted cautious commentary on low-end consumers from recent earnings reports, indicating pressure on consumer-related companies.
Investors are closely monitoring forecasts from top US retailers like Walmart Inc. and Target Corp., as well as the latest consumer sentiment readings. Matt Maley, chief market strategist at Miller Tabak + Co., emphasized,
“One of two things has to happen between now and the end of the summer: either guidance improves dramatically or interest rates come down… Otherwise, we may see another leg lower and probably a full correction in the S&P 500.”
