The U.S. stock market is warning investors about earnings, and it’s time to pay attention.
The S&P 500 Index slipped into a correction on Dec. 7. It ended the day down 10.2 percent from its recent peak on Sep. 20, breaching the 10 percent decline that customarily marks a correction. The index is little changed this week through midday Friday.
Investors are comforting themselves, as they have all year, with reassurances about strong fundamentals. According to estimates compiled by Bloomberg, Wall Street analysts expect earnings for the S&P 500 to grow by 12 percent in 2018 and by an additional 9 percent in 2019. That’s well above the average growth rate of 4 percent a year since 1871, according to numbers compiled by Yale professor Robert Shiller.
It’s false comfort, however. As I pointed out in May, declines in the stock market most often precede slumps in earnings rather than the other way around. And this would be a particularly bad time for earnings to disappoint. Stock prices have rarely been as vulnerable to a downturn in earnings as they are today. If the market decides that the earnings outlook is too rosy, the recent sell-off could get a lot worse.Continue reading “Stocks Are Sounding the Alarm on Earnings”