The Bull in the Wall Street Area. (Photographer: Michael Nagle/Bloomberg)

Rattled Bulls Cling to Predicted Earnings Surge to Save Stocks

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(Bloomberg) -- This too shall pass.

At least that’s the mantra shaken bulls are repeating after renewed selling in once high-flying technology shares and angst over a trade war sent the S&P 500 tumbling to the lowest level since early February.

They point to the cornerstone of the nine-year bull market as the reason for confidence: rising corporate earnings. In fact, amid the recent turmoil, analysts have grown more confident that economic strength will show up on the bottom line. They now anticipate first-quarter profit growth of 17 percent, up from 13 percent at the start of January.

“Yes, you have trade war issues, you have uncertainty around the tech sector, but if things stay where they are and the first-quarter earnings show solid growth, stocks will have a good reason to rise,” Don Selkin, a 75-year-old chief strategist at Newbridge Securities Corp., said by phone. “It’s ironic that the markets are going down ahead of the earnings season as the earnings growth estimates are going up.”

There were few signs of such optimism Monday, as overnight weakness quickly turned into a rout. Tweets from President Donald Trump attacking Amazon.com Inc. sent big tech shares careening lower, while a report that Apple Inc. might ditch Intel Corp. rattled high-flying chipmakers. In the background was news that China issued retaliatory tariffs on $3 billion of American goods, stoking trade anxiety.

While investors have pulled money from tech shares, analysts expect the sector to carry the earnings load, according to Bloomberg data, at least in the first quarter. They forecast the largest group by weighting in the S&P 500 to increase profit by 25 percent in the period, with chipmakers pushing profits higher by 31 percent. Banks should pick up the baton as the year wears on, the analysts predict, lifting profit growth in the S&P 500 to 21 percent in the third quarter.

If during the coming reporting season companies warn that those heady targets might not be met, that could spell immediate trouble for already wobbly U.S. stocks.

“What may be a negative catalyst is an earnings season where companies give negative forward guidance because of Trump’s tariffs or something else,” said Ian Winer, co-head of equities at Wedbush Securities. “We might see a positive surprise which will give the reason for a further rally, but what if the earnings disappoint? We’ll have a problem here.”

With quite a few unknown factors ahead, investors in general remain optimistic, according to a survey conducted by RBC Capital Markets. About 45 percent of investors polled by the firm in late March said they were bullish or very bullish on U.S. stocks, even as about the same number of investors said they became less optimistic in the past three months.

“We didn’t see evidence of capitulation, however, as only 20 percent describe themselves as bearish or very bearish,” Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets, said in a note on Monday. The survey is telling us “that bearishness doesn’t run deep.”

©2018 Bloomberg L.P.

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