Is The Stock Market Beginning To Reflect Declining Earnings?
Will The Optimism Of Investors Be Disappointed?
IS THE STOCK MARKET BEGINNING TO REFLECT DECLINING EARNINGS?
It remains our view the recent stimulus-induced surge in global economic growth is temporary and will slow considerably in the second=half of 2021.
This view is supported by analyst earnings estimates that suggest a sharp decline in corporate profit growth in coming quarters. Analyst estimates tend to be optimistic and are far more apt to be revised downward over time rather than upward. Therefore, actual results will more probably be less than forecast.
This prospect is a real concern for stock markets which continue to reflect an assumption of continued robust earnings growth.
Does the recent weakness by stock markets reflect the beginning of doubts by investors about the earnings assumptions that have fueled their optimism since March 2020?
Upward pressure on interest rates, COVID induced supply disruptions, and a slowing global economy is the most conspicuous of a host of influences that could exert downward pressure on corporate earnings going forward.
More concerning for investors is that just a return to the long-term earnings growth trendline could prove problematic for a market priced to reflect much higher growth.
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