Threat to the rising trend of US stocks! Uncertain interest rate cut expectations, the outlook for performance is not optimistic
The rising trend of the US stock market is under threat, with uncertain rate cut expectations and a challenging earnings outlook. While 79% of companies in the S&P 500 index have exceeded profit expectations, stock performance remains weak as traders are skeptical about companies fulfilling their promises in the future. The S&P 500 index has risen by 20%, with a high forward P/E ratio of 20, and traders are seeking reasons to justify the high valuation. Additionally, the US economic growth is slowing down, inflation pressures exist, uncertainty around rate cuts is increasing, and corporate profit growth faces challenges. In the S&P 500 index, chip manufacturers are expected to grow by around 40% in the second quarter
The strong profit performance of American companies may no longer be enough to sustain the rise of the US stock market. What is more important is the earnings guidance. According to compiled data, over 400 companies in the S&P 500 index have reported their financial results this quarter, with 79% of companies exceeding expectations. However, on the day of earnings announcements, the median stock performance was less than 0.1% higher than the index, the smallest gap since the end of 2020. This weak market response can be explained by one thing: traders do not believe that companies can fulfill their promises in the future, as earnings guidance is weaker than expected, which is weighing on the stock market.
According to the data, among the S&P 500 index companies that released earnings forecasts in April, 15% of companies exceeded expectations, the second lowest level since the pandemic. There has been a slight increase in the past week, with companies like Apple (AAPL.US) providing better-than-expected forecasts, pushing this proportion up to 18%, but still low compared to historical levels.
From the end of October last year to April this year, the S&P 500 index has risen by 20%, pushing its forward P/E ratio to 20 times, about 11% higher than the 10-year average level. Traders are now looking for reasons to justify the high valuation and hope to see greater growth in the future. Keith Buchanan, Senior Portfolio Manager at GLOBALT Investments, said: "The market is quite optimistic, and if disappointment occurs, there will be a significant downturn afterwards. Given the high valuation, earnings guidance is crucial this quarter."
With the US economic growth rate in the last quarter dropping to a near two-year low, persistent inflation pressure, and uncertainty about interest rate cuts, the threshold for corporate profit growth has been raised. Quincy Krosby, Chief Global Strategist at LPL Financial, said: "If you can't get rate cuts, you have to substitute with something else. It has to be earnings guidance, because what else is there?"
According to the data, chip manufacturers in the S&P 500 index are expected to grow by about 40% in the second quarter, the fastest among all industry groups. However, this is still not enough to keep the Nasdaq 100 index above its level before the earnings season, as some of the largest chip manufacturers have issued profit warnings for the future. The world's largest personal computer processor manufacturer, Intel Corporation (INTC.US), released lower-than-expected second-quarter earnings forecasts, leading to a sharp drop in the company's stock price. AMD (AMD.US) also issued disappointing forecasts for its artificial intelligence processor revenue, causing its stock price to fallAs for other industries, the results led by consumers will still take several weeks to be announced. Investors will see performance forecasts from major U.S. retailers such as Walmart (WMT.US) and Target (TGT.US) later this month, as well as the latest consumer confidence index to be released next week.
However, strategists led by Mike Wilson at Morgan Stanley pointed out that in the recent restaurant performance reports from McDonald's (MCD.US) and Darden Restaurants (DRI.US), comments on low-income consumers have become increasingly cautious, with both companies emphasizing a decline in visits by low-income consumers. Starbucks (SBUX.US) stated that due to a decrease in transaction volumes in each region this quarter, sales have declined for the first time since 2020, leading the company to lower its full-year revenue growth forecast to low single digits.
Mona Mahajan, Senior Investment Strategist at Edward Jones, said: "We will certainly remain cautious about the performance guidance of some consumer-related companies, as low-income consumers seem to be under some pressure."
Matt Maley, Chief Market Strategist at Miller Tabak + Co, said: "Two things must happen from now until the end of summer: either significant improvement in guidance, or a decrease in interest rates. Otherwise, we may see the S&P 500 index fall again, or even a comprehensive pullback."