Profit Revisions Are Flashing a Ray of Light in Stock Darkness

(Bloomberg) -- As global equity markets buckle, bulls have been left searching for signs of solace. Here’s one: Bearish revisions to corporate earnings may have found a floor.

A Citigroup Inc. global gauge of analyst revisions to profit expectations has been rising since mid-July -- a source of potential comfort to dip-buyers on Wednesday, given the long-term link between that measure and the MSCI World Index.

The trend is a sign that while forecast downgrades still exceed upgrades -- as they have almost every week in the past year -- the news is getting less bad as the earnings season rolls on.

The profit story has armed bears with ammo over the past 12 months. Margins are expanding at a slower rate, profit growth has slowed, and simmering cross-border tensions darken the outlook for consumer and industrial demand.

Yet since June in particular, world equity gains have been propelled by rising valuation expansions even as analyst revisions deteriorated -- setting the stage for a sharp pull-back on the heels of the intensifying trade war.

But so far, growth in corporate income hasn’t collapsed, while the relative revisions story is improving for now. In a Monday note urging investors to buy the dip, JPMorgan Chase & Co. pointed out that 78% of S&P 500 companies have beat estimates for second-quarter profit, which on aggregate are up 4% from the prior year.

--With assistance from Jeremy Herron.

To contact the reporter on this story: Justina Lee in London at jlee1489@bloomberg.net

To contact the editors responsible for this story: Blaise Robinson at brobinson58@bloomberg.net, Sid Verma, Samuel Potter

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