(CTN News) _ The earnings growth of S&P 500 companies will now remain on the radar of investors and analysts.
A year after near-zero interest rates, the US economy is facing tough times with interest rates around 3%, following September’s third consecutive hike of 75 basis points.
As the outlook for the market remains gloomy, the valuations of many stocks may fall further. If earnings growth is not visible in the US economy, a big reversal may not occur.
In the second quarter, S&P 500 earnings increased more than 8%, but declined more than 2% excluding energy. In a few weeks, third-quarter earnings will begin, and much hand-wringing will occur about whether economic weakness will hurt earnings.
Ultimately, expected earnings growth is expected to decline year-over-year (as per the note). FedEx’s expected earnings implosion and the removal of all forward-looking guidance is a canary in the coal mine. In the last two quarters, stocks of companies beating estimates got rewarded, but at a lower rate. Stocks of companies that missed estimates got punished more than ever before.
In the third quarter of this year, S&P 500 earnings are expected to grow by 5%; if the Energy sector is excluded, earnings will drop by nearly 2%.
In the last two quarters and the first two quarters of next year, earnings estimates have been on the decline.
In June, third-quarter estimates peaked at over 11%, while fourth-quarter estimates have fallen by more than half since then.
The first half of next year’s estimates are also way down from earlier this year, although they did pick up in August.
The growth of S&P 500 earnings is a big factor in stock prices. Stocks are a discounting mechanism, so one might expect great stock market performance to follow high earnings growth rates.
Three days after the bear market plunge started, earnings growth was over 32% from the fourth quarter of last year.
What is a good earnings growth rate?
In the past, earnings S&P 500 growth of more than 20% has been associated with a barely positive annualized return of less than 2%; the best period for stocks has been when earnings growth is between -20% and +5%.
Stocks perform worst when earnings are imploding (worse than -20%).The data shows that once earnings bottom and begin to accelerate, the strongest market gains occurred.
