History shows Wall Street analyst estimates can be 30% too high at the peak, which one strategist says may be now
By Steve Goldstein
Critical information for the U.S. trading day
Markets have had a bouncy few days, with investors not really sure what to expect from interest rates, politics or the broader economy. Last night's U.S. presidential debate and the August inflation report due Wednesday may or may not reduce that uncertainty.
What is clear is that right now there's a mismatch. Wall Street analysts expect corporate earnings in a year's time to grow by about 14%. But a host of economic indicators point to companies having a tough time achieving that.
The most jarring of those indicators was the new-orders component of the ISM manufacturing sector index, which was 44.6 in August on a 0-to-100 scale where readings under 50 point to deteriorating conditions.
"Keep in mind that if the Fed has tightened sufficiently to get top-line growth (nominal demand) into line with the growth rate of productive potential, corporate pricing power will also ease back with inflation and inflation expectations," says Michael Darda, who is chief economist and market strategist at Roth MKM. "Perhaps analysts - in the throes of the AI frenzy - are simply assuming that rapid sustained productivity growth will fill the void here and deliver spectacular earnings growth despite unspectacular top-line growth/corporate pricing power."
Darda, as that tone suggests, is doubtful AI, or anything else, will deliver those productivity gains. He says recent positive trends in productivity data owe more to reversals in distortions from supply-chain disruptions than anything else.
One thing he finds, perhaps surprising to even the most cynical of market observers, is that Wall Street earnings estimates are usually quite good. On average, 12-month forward earnings estimates have run about 7% above actual earnings results 12 months later, but that's almost exclusively due to analysts being caught flat-footed at turning points, he says. In the last four cycle peaks - in 1990, 2001, 2007 and 2020 - 12-month forward estimates were 29.8% above actual results.
A 30% gap in earnings also would be consistent with the price-to-earnings ratio falling back to 15 from 21. "Although this has happened many times in history (usually but not always going into recession periods) there seems to be no concern whatsoever that such a compression would be a live possibility. With the WSJ quoting people in their late 60s saying things like the 'conservative' strategy to risk markets is 'all in, all the time' even a real correction of 10-15% from the recent highs would likely be startling to many who have been lulled into the 'up and to the right' indefinitely and forever trade," says Darda.
The market
U.S. stock index futures (ES00) (NQ00) extended losses after the CPI data, having been down on the impact of the presidential debate. Bond yields turned higher.
Key asset performance Last 5d 1m YTD 1y S&P 500 5495.52 -0.60% 1.12% 15.21% 23.17% Nasdaq Composite 17,025.88 -0.64% -0.94% 13.42% 23.61% 10-year Treasury 3.625 -13.40 -21.50 -25.59 -63.44 Gold 2550.4 0.95% 2.59% 23.10% 32.10% Oil 67.5 -2.53% -12.59% -5.37% -24.03% Data: MarketWatch. Treasury yields change expressed in basis points
The buzz
The inflation report saw consumer prices rising 0.2% as expected but core prices increasing a stronger-than-forecast 0.3%.
Betting markets judged Vice President Kamala Harris to be the winner of the presidential debate, in a showdown where tariffs and taxes, and alleged pet eating, were among the talking points.
Trump Media and Technology (DJT) shares tumbled in premarket trade.
GameStop (GME) said it was selling up to 20 million shares of stock as the video-game retailer's sales declined in the second quarter.
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-Steve Goldstein
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09-11-24 0833ET
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