BlackRock: Even with a slight decline in profit expectations, stock market valuations still have support
BlackRock's Zhuo Er mentioned that although global companies are optimistic about this year's profit expectations, the stock market can absorb the impact of a slight profit downgrade. She pointed out that profit forecasts for 2024 have been postponed to the second half of the year, and a slight decline would not be surprising. Despite concerns about economic recession and weakening demand, the stock market continues to rebound. Analysts expect a 9% growth in profits for S&P 500 index components in 2024. The optimistic sentiment from the Fed's rate cuts has boosted the market, with the MSCI Global Index P/E ratio at 18 times, showing confidence in an economic soft landing
According to the financial news app Zhitong Finance, Helen Jewell, Chief Investment Officer for BlackRock Fundamental Equities in Europe, the Middle East, and Africa, stated that global companies seem optimistic about earnings expectations for the remainder of this year. However, the stock market may also be able to digest the impact of a slight downward revision in earnings expectations.
Jewell mentioned that profit forecasts for 2024 have been "delayed" until the second half of the year, stating, "I wouldn't be surprised if this forecast starts to decline slightly." She noted that this does not necessarily mean the market will fall, as valuations are "not outrageously high," and added, "Earnings may decline, but the price-earnings ratio will increase slightly to offset this expectation."
Despite concerns about a possible economic downturn and weakening consumer demand dimming corporate profit prospects, the stock market has rebounded this year. Data compiled by Bloomberg Intelligence shows that analysts currently expect profits of S&P 500 index component companies to grow by around 9% in 2024, slightly lower than the 11% forecast in December last year.
Analysts anticipate a slowdown in profit growth to 4.4% in the third quarter, followed by a surge of 10% in the fourth quarter of this year. According to an index from Citigroup, since the end of June, more analysts have lowered global expectations than raised them.
Meanwhile, the optimistic sentiment boosted by the Federal Reserve's timely interest rate cuts to avoid an economic contraction has kept the MSCI All-Country World Index from Morgan Stanley Capital International hovering near record highs. Data compiled by Bloomberg shows that the index's expected price-earnings ratio is 18 times, compared to its 20-year average of nearly 15 times.
At the same time, analysts' profit expectations for the next 12 months remain at historically high levels, reflecting confidence in a soft landing. Economic forecasts indicate that the real Gross Domestic Product (GDP) of the United States is expected to slow to 1.7% in 2025 before rebounding next year.
Data compiled by Business Insider shows that in Europe, analysts' profit expectations for companies in the STOXX 600 index have declined by 2.8% since the beginning of the year.
Jewell still favors stocks related to the economy and industries that benefit long-term from artificial intelligence. However, in the coming months, she recommends stocks sensitive to interest rates and defensive stocks considered safer during periods of economic uncertainty. Jewell expects events such as the U.S. presidential election to cause market volatility, keeping the stock market "sensitive" until the end of the year.
Jewell mentioned that a major risk in 2025 is the potential magnitude of profit expectations being revised downward. She stated, "If we see a significant decline in earnings, the market will fall. A soft landing is a series of outcomes, and any situation that is too close to the recession endpoint of a soft landing will undoubtedly be severely impacted by the market."