Wall Street Experts Think Corporate Profit Growth Will Surge by Middle of Year


During the last 3 months companies in the S&P 500 have offered the fewest updates, positive or negative, since 2000.

Its that time of year again, you know the one American companies go through every three months. For this quarter, it begins October 15th with reports from several big banks. One of the most interesting parts of the ritual this time is that during the last 3 months companies in the S&P 500 have offered the fewest updates, positive or negative, since 2000.

In between these reports, executives will continue to issue "guidance", either creating higher or lower expectations with speeches at conferences or other events so official results don’t jolt investors.

“Companies are starting to do what they do when there is rampant uncertainty, which is just stop issuing guidance,” said Savita Subramanian, head of United States equity strategy at Bank of America Merrill Lynch. “Companies just basically go dark.”

The “rampant uncertainty” that Ms. Subramanian referred to flows from many sources: signs that the economy and job growth are slowing, evidence that the manufacturing sector may already be in a recession, and the trade war’s toll on China, Japan and Germany.

The President said on Friday that the United States and China had reached an interim deal to avert tariffs planned to take effect on Tuesday.However, since the agreement was spoken and would take several weeks to write, it did little to remove the uncertainty surrounding the economic battle between Beijing and Washington.

Regardless of the companies’ reasons, the relative silence since their last reports means stock investors may be in for a lot of bad news all at once.

Right now, the collective forecast is that profits at S&P 500 companies will jump more than 10 percent in 2020, a view that defies expectations for the economy to slow further.

“It doesn’t look likely,” said Ralph Davidson, chief global equity strategist at BTG Pactual, a Brazilian investment bank, of the profit forecast. “We expect guidance to be coming down.”

Last October, they were forecasting that profits would grow about 10 percent in 2019. As the year progressed, and companies reported results, the analysts cut the forecast down, again and again leading to a current expected growth of just under 2 percent once the year is done. For the third quarter, which ended in September, analysts expect S&P 500 companies to report that their profits fell 3 percent.

Lower profits aren’t necessarily a sign on a slowing economy. One reason corporate earnings have dropped is that wages have been rising. That reflects the strong job market and helps support consumer spending, which is the bedrock for economic growth in the United States.

“I think we’re going to see a wave of negative guidance on next year’s earnings,” said Ms. Subramanian of Bank of America. “And that might not be great for the market.”

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Economics, Finance and Investing