The quarterly earnings season on Wall Street is a key influence on global market sentiment. The bad news for investors is that the looming ream of third-quarter updates from S&P 500-listed firms in America is likely to be gloomy. Even as the US stockmarket hit a four-year high last quarter, year-on-year earnings growth for S&P 500 firms slowed to just 0.8%.
Analysts, who have been rapidly paring back their eternally optimistic forecasts, now expect earnings to shrink in the third quarter, says Ajay Makan in the Financial Times. “Companies themselves are even more downbeat.” In the last reporting season they were three times more likely to say they would miss third-quarter forecasts than beat them. That’s the worst guidance ratio since late 2008. In fact, these are numbers typical of a recession, says Christine Short of S&P Capital IQ.
Because profit margins are already at near-record highs, American firms need sales growth to boost earnings – but they aren’t likely to get it. Foreign sales account for a third of S&P 500 revenues and these will be affected by the slowdown in the global economy.
Parcel delivery group Fedex, which tends to be sensitive to changes in the global economy, has just forecast its first quarterly profit decline since 2009. US economic momentum is ebbing even before America joins the rest of the world in cutting its debt. The S&P also looks expensive on a cyclically adjusted price/earnings ratio of 20 – making it even more vulnerable to disappointing earnings reports.