Evaluation: Traders fear that US revenue forecasts are too excessive

A dealer watches the display at his terminal on the ground of the New York Inventory Trade in New York October 15, 2014. REUTERS / Lucas Jackson / File Picture

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NEW YORK, June 16 (Reuters) – Issues are rising that US company earnings are more and more in danger from dizzying inflation, a powerful greenback and rising rates of interest, complicating the outlook for traders already reeling from the S&P 500’s bear market affirmation earlier this week.

Whereas second-quarter revenue progress forecasts have fallen in latest weeks, estimates for the third and fourth quarters and for all of 2022 have held up or risen, in line with IBES knowledge from Refinitiv. As of Friday, Wall Road analysts anticipated S&P 500 earnings to develop by 9.6% in 2022, up from 8.8% initially of April and from 8.4% on Jan. 1.

Strategists fear these estimates are unlikely to carry up. Many count on extra detrimental outlooks from US corporations within the coming weeks and mentioned that steering will then be mirrored in consensus revenue progress estimates.

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Most S&P 500 corporations will report second-quarter earnings after mid-July, and software program big Microsoft (MSFT.O) and retailer Goal (TGT.N) have been among the many corporations issuing dour outlooks in latest weeks.

“Estimates are too excessive, and you will see them begin to come down because the second-quarter numbers come out and as corporations speak about what they’re seeing,” mentioned Peter Tuz, president of Chase Funding Counsel.

Falling revenue expectations may spell extra bother for a market that has been pummeled by worries over how an aggressive Federal Reserve response to surging inflation may hit progress.

The S&P 500 (.SPX) completed Monday greater than 20% beneath its file closing excessive, confirming the index is in a bear market, in line with a generally used definition. The drop adopted stronger-than-expected inflation knowledge final week that ratcheted up expectations for a way a lot the Fed might want to tighten financial coverage with the intention to tame client costs. learn extra

The Ate up Wednesday raised charges by 75 foundation factors, its largest enhance since 1994 and has now elevated borrowing prices by a complete of 150 foundation factors this yr. learn extra

Worries that company earnings are wavering may bolster the argument that shares stay richly valued, even after their sharp decline this yr. The S&P 500’s ahead 12-month price-to-earnings ratio stood at 17.1 as of Friday versus 22.1 on the finish of December however was nonetheless above its long-term common of about 16, Refinitiv knowledge confirmed.

Challenges going through US corporations embody a stronger greenback, which was cited by Microsoft when the software-maker reduce its fourth-quarter forecast for revenue and income earlier this month. A stronger buck sometimes eats into the earnings of corporations which have worldwide operations and convert foreign exchange into {dollars}. learn extra

The US foreign money is up about 9% thus far this yr and close to a two-decade excessive in opposition to a basket of its friends, pushed by expectations of upper US charges and heightened geopolitical tensions.

After Microsoft’s announcement, traders will probably be listening for what different software program and tech corporations like Adobe Inc (ADBE.O) and IBM(IBM.N) need to say about foreign money points in upcoming studies, mentioned Daniel Morgan, portfolio supervisor at Synovus Belief. Adobe is because of launch second-quarter outcomes after the bell Thursday.

Additionally intently watched will probably be retailers and different client discretionary corporations, which have struggled beneath the results of surging inflation. Shares of Walmart (WMT.N) and different huge retailers took successful final week after Goal reduce its quarterly revenue margin forecast and mentioned it must supply deeper reductions to clear stock. learn extra

Different challenges embody sky-high oil costs and rising rates of interest, which have weighed on tech and progress shares, whose valuations closely depend on future money flows. Latest COVID-related lockdowns in China may additionally take a toll. learn extra

“We count on the vitality crunch to hit progress and better labor prices to eat into earnings. The issue: Consensus earnings estimates don’t seem to mirror this,” analysts at Blackrock wrote in a latest notice on why they aren’t “shopping for the dip “in shares.

To make certain, whereas client spending is “shifting,” it doesn’t appear to be slowing, mentioned Steve DeSanctis, small- and mid-capitalization fairness strategist at Jefferies. That will recommend some retailers may gain advantage from altering client habits, at the same time as others really feel the pinch.

On the identical time, traders could already be pricing in anticipated hits to earnings given shares’ latest tumble, mentioned Kristina Hooper, chief international market strategist at Invesco.

“The query turns into whether or not it comes so quick and livid that it actually shakes market confidence even additional,” she mentioned.

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Reporting by Caroline Valetkevitch; Further reporting by Sinead Carew in New York; Enhancing by Ira Iosebashvili and Lisa Shumaker

Our Requirements: The Thomson Reuters Belief Rules.

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