The stock market will soon face another test, and the coming months may or may not stand on it

Analysts since June 30, according to FactSet senior analyst John Butters They lowered their estimates for third-quarter profit growth by 5.5 percentage points. This is more than usual and the biggest decrease since the second quarter of 2020 – that is, the outbreak of Covid.

Companies also seem increasingly pessimistic lately. A total of 240 companies in the S&P 500 index mentioned a recession on conference calls after the previous quarterly flash reports, which according to FactSet data going back to 2010 most.

Even with the gloomy outlook for the upcoming flash reporting season, markets appear resilient. That’s partly because companies are still expected to report modest profit growth for the rest of the year and other data, such as employment and consumer spending, continue to show the economy’s strength. But investors and analysts warn that the stock’s recent rally looks vulnerable if the data turns for the worse in the coming months.

There is this very unpleasant combination of very high inflation, an already slowing economy and a rapidly tightening central bank

– said Dave Grecsek, Aspiriant’s managing director of investment strategy and research. Grecsek added that the valuation of shares remains high. According to FactSet, the S&P 500’s 12-month forward P/E ratio is 17, which is below the five-year average but above the value measured at the end of the second quarter, as stock prices rose while profit expectations fell.

“All in all, I don’t really feel like this is a good time to take a risk,” Grecsek said.

Despite last week’s rise and short summer rally, the S&P 500 is down 15 percent compared to the beginning of the year. The Dow Jones is also down 12 percent for the year.

To be sure, companies have largely proved more resilient to slowing growth and high inflation than investors had feared. Home Depot last month reported record earnings and revenue for the second quarter, thanks in part to consumers spending more at each transaction than a year ago.

Consumers have been “more resilient than we expected at the beginning of the year,” said Richard McPhail, the company’s chief financial officer. Other companies with a strong consumer focus, such as Dick’s Sporting Goods, Walmart and Kroger, also posted stronger-than-expected results.

Many investors fear that eventually companies that have been able to weather rising costs by raising the prices of goods and services will be less able to do so as the Fed continues to tighten monetary policy.. The Fed has made clear that it is determined to reduce inflation through rate hikes, even if it comes at the expense of economic growth.

If revenues are down but labor, material and other costs are still challenging, that can be a real headwind to profits

said Anujeet Sareen, portfolio manager at Brandywine Global. Sareen’s team has generally reduced exposure to riskier assets this year, focusing on companies with what appear to be the strongest balance sheets.

So far, despite the decrease in profit expectations, the companies have not started making losses. Companies in the S&P 500 still expect third-quarter profit growth of 3.7 percent, according to FactSet. This would represent the slowest growth rate since the third quarter of 2020.

Although some investors see declining earnings expectations as an ominous sign, Jonathan Golub, chief U.S. equity strategist at Credit Suisse during periods of high inflation, corporate results have historically peaked just two months before the onset of recession. This means that profit estimates would have to fall by a much larger amount to signal the approach of an economic downturn, he said.

Cover image: Getty Images

Source: – Befektetés by

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