Stock Analysts Zig While the Fed Zags
(Bloomberg Opinion) -- The Federal Reserve and analysts just can’t seem to get on the same page.
Just as the central bank signaled its cautiousness about the economy, estimates of corporate profit growth for companies in the S&P 500, after falling for nearly all of this year, have suddenly begun to pick up. Analysts raised their earnings expectations to a collective $169.40 a share, Bloomberg reported on March 18, based on calculations for the next four quarters. The move isn’t big yet — it’s up just a dollar — but it could be the beginning of a trend. It was the first week-over-week earnings increase since November, according to Bloomberg data. Profit forecasts have dropped nearly 5 percent this year. Ed Yardeni, a popular strategist who watches earnings estimate trends closely, says earnings prospects bottomed three weeks ago and are now looking up. Based on his numbers, S&P 500 earnings expectation have moved to $172.19 a share, up from $171.37 in early February.
That contrasts sharply with the Fed, which, it seems, is throwing in the towel. On Wednesday, the Fed announced that not only would it keep rates where they are, it forecast no more rate increases for the rest of the year. The central bank also said it would stop winding down the portfolio of bonds it bought in the wake of the financial crisis — another way the Fed has kept interest rates low and stimulated the economy.
The Fed’s moves seemed to unnerve investors at first, reinforcing the view by some that a recession could be coming sooner than expected. Indeed, first-quarter profit expectations had dropped pretty steeply until they turned recently. GDP growth in the 1 percent ballpark seems likely for the first quarter. Stocks dropped on Wednesday, even though lower interest rates are usually something that investors like. But on Thursday, investors once again seemed confident that the economy would keep growing and that the Fed’s lack of interest rate increases would only juice asset prices and maintain the benign lending environment that has been a friend to large corporate borrower and subprime auto buyer alike. The S&P 500 Index rose almost 1.1 percent.
A number of Fed watchers were skeptical about its caution, suggesting its motivation seemed to be driven less by economic data and more by a mix of other concerns, including fear of market volatility and political criticism. Also, many think a good portion of the first-quarter’s economic weakness is related to the government shutdown, delaying economic activity to the second half of the year.
Then the Fed sensibility struck back on Friday. A closely watched section of the Treasury yield curve turned negative for the first time in more than a decade, a reliable predictor of a coming recession, and weak manufacturing data from Germany renewed concerns about global growth. The S&P 500 lost Thursday’s 1.1 percent gain, and then some.
The renewed confidence in profits is sending a premature bullish signal to investors. While earnings growth is picking up, at 5 percent it’s still a lot slower than the 23 percent growth last year, though a lot of that was due to the one-time boost of the tax cut. What’s more, the current estimate for the S&P 500 companies’ earnings is still down from the $175 a share it was in November, according to the Yardeni numbers. Not to mention that the global economy seems weak and that a strongish dollar and continued trade tensions could disrupt foreign sales.
Investors’ risk is getting caught in a Catch-22. If they bet wrong about an upticking economy, sales and profits will surely disappoint. If they are right, and the Fed stands still, labor costs and other input costs will most likely rise, eroding the still high profit margins that are baked into this year’s profit-growth expectations. Fighting the Fed is often a losing proposition.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Stephen Gandel is a Bloomberg Opinion columnist covering banking and equity markets. He was previously a deputy digital editor for Fortune and an economics blogger at Time. He has also covered finance and the housing market.
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