The stock market will struggle for the next 2 years as earnings expectations are spiraling out of control: economist

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Wall Street analysts may be setting the bar too high when it comes to future corporate earnings, according to a market economist. “The implication is that [earnings per share] it will have to perform even better than analysts generally forecast between now and the end of 2022 if the S&P 500 gets a boost from this source, ”John Higgins, chief markets economist at Capital Economics, wrote in a note. “We think it is unlikely, despite our positive outlook on the US economy.”

Counterpoint: why it may still be early for the stock market revival The best on Wall Street are typically seen as setting the bar low when it comes to corporate earnings. But optimistic expectations fueled by visions of a soaring US economy as the COVID-19 pandemic fades in the rearview mirror, courtesy of vaccines, has made future earnings forecasts solidly higher. In fact, “they appear to be very optimistic even considering the fact that the US economy is likely to perform especially well for the rest of this year and next,” Higgins said. For the companies that make up the S&P 500 SPX index, + 0.07%, the consensus forecast for operating earnings per share (EPS) for the last 12 months in the fourth quarter of 2022 is about 29% above operating EPS real for the last 12 months. in the fourth quarter of 2019, the last full quarter before the COVID-19 pandemic hit the global economy (see chart below), he noted, noting that it is also more than Capital Economics’ forecasts for nominal growth. of U.S. gross domestic product in the same period. period.

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Capital economy

It’s not a uniform picture across industries, Higgins acknowledged. The gap between the forecast for the fourth quarter of 2022 and the current 12-month operating EPS for the fourth quarter of 2019 remains substantially negative for the real estate sector and slightly negative for the financial sector. But it is positive by more than 50% in three other sectors: health, information technology and materials. Companies have largely had no trouble beating Wall Street expectations for the first quarter so far this earnings reporting season. But just because analysts appear to have underestimated the earnings rally in the first quarter “doesn’t mean they’re being overly conservative about the future,” Higgins said. Despite strong earnings results this quarter, stocks have traded more or less sideways, albeit at or near record levels, as the reporting season rolled into full swing this week. The Dow Jones Industrial Average DJIA, -0.33% is still up 10.7% so far in 2021, while the S&P 500 has recovered around 11.5%. The Nasdaq Composite COMP, -0.07% is up more than 9%, setting its first record close since February earlier this week. The price investors are willing to pay for earnings is already at a historically high level, Higgins noted, and is unlikely to rise significantly if, as Higgins expects, long-term returns on inflation-protected Treasury securities , or TIPS, see a significant increase and investors have the feeling that the scope is limited to compensate for the fall in credit spreads – the difference between the yields on corporate debt and Treasury bonds. That’s why the S&P 500, which is currently trading around 4,190, is likely to see a bit more bullish in 2021, Higgins said, noting that Capital Economics has a year-end forecast of 4,200 and may have a hard time getting. small gains in 2022 and 2023.