The Day The Stock Market Music Died
The U.S. stock bull market is alive and well
While a breakout by the S&P 500 Index above its January peak remains elusive, it seems only a matter of time before the fresh new all-time high confetti is once again falling from the rafters. But underneath the market surface, a disconcerting trend with corporate earnings began developing a few months ago and is continuing to pick up steam. As stocks chase new all-time highs, are they doing so long after the corporate profit music has died?
The projected power of earnings growth was awesome
No sooner did the U.S. Congress pass their tax cuts at the end of last year and forecasts for corporate earnings started to get revised sharply higher. And for the first four months of the year, company after company rolled out upward revisions to their forward earnings guidance. Everything was coming up fantastic underneath the market surface despite all of the headline volatility that erupted in the first few months of the year.
The day the stock market music died
Then came April 26. On this date, the forecasts for stock market earnings reached their peak. And in the months since, these forecasts have rolled back over at an accelerating rate.
Consider the following. On April 26, the following were the projected 12-month earnings per share on a GAAP basis according to S&P Global:
2018 Q1 $117.79
2018 Q2 $128.56
2018 Q3 $139.63
2018 Q4 $154.23
2019 Q1 $158.24
And here is where these same readings are as of the most recent reading on August 10.
2018 Q1 $115.44 (final reading), lower by -2.00%
2018 Q2 $122.65 (>90% of companies reported), lower by -4.60%
2018 Q3 $131.26, lower by -6.00%
2018 Q4 $143.66, lower by -6.85%
2019 Q1 $148.51, lower by -6.15%
Don't get me wrong
The forecasts are still calling for phenomenal annual earnings growth in the +20% to +30% range on a year-over-year basis in the coming quarters. It's just that these forecasts were in the +30% to +40% range a few months ago. Thus, it is more a story about a deceleration in growth at this stage. But it should also be noted that earnings results for the third quarter, the fourth quarter and the first quarter of next year are still many months away at this point. In the meantime, these forecasts are dropping like a rock.
Source: https://seekingalpha.com