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This is one of the prime reasons why investors are so nervous about the stock market at such lofty levels today:
The key support of profit growth is conspicuously absent!
And the story doesn’t get much better going forward, either.
Wall Street analysts have penciled in an S&P earnings decline of 2.1% for the third quarter … which would be the sixth straight quarter of falling corporate profits.
This has rarely happened outside of a U.S. economic contraction.
However, there is cause for some guarded optimism for a corporate profit recovery ahead.
In other words, I put more faith in the trend of forward earnings estimates, than in the actual results from looking backward, and you should, too.
Here’s where the story turns more bullish, especially for certain sectors of the stock market. The earnings revision ratio (ERR) for the S&P 500 has been in an uptrend recently.
This simply means more upward profit-estimate revisions as compared with downward revisions among S&P companies.
The one-month ERR improved to 1.13 in August, according to Merrill Lynch data, a sign of more upward than downward revision for the first time since May.
The technology sector of the S&P 500 was “most-improved” in terms of upside earnings forecasts last month (see chart above), with three-times more upward revisions versus cuts in August. That was the highest reading in six years!
It’s no wonder technology is also the best-performing sector over the past two months.
Healthcare, financial and utility stocks are likewise posting nice positive trends in profit forecasts. Also, multinational stocks that do big business in overseas markets are scoring the best upward revisions of all, compared with domestic-oriented stocks.
In fact, the one-month revision ratio for multinationals surged to 1.49 last month – meaning 3 upward profit forecasts for every 2 estimate cuts – that’s the highest since mid-2014.
The recovery in emerging markets plays a big role here, since these are some of the best customers for U.S. multinational companies. Technology, healthcare, energy and industrial companies all earn a large share of sales and profits from overseas.
The uptrend in earnings revisions is a bullish sign for corporate profitability going forward. Still, many investors are asking: When will the earnings recession ever end?
It’s a perfect excuse for sticking to the sidelines and staying out of the stock market, but perhaps the earnings recession is already coming to an end.
The government maintains an alternate calculation of corporate profits. It’s part of the quarterly gross domestic product (GDP) report.
And according to this data, we passed the low point in corporate red ink back in late 2015 (see chart above), with profits down more than 10% year-over-year. Since then, it has improved.
True, profits are still in the red, according to the GDP data, but they’ve gotten progressively less-bad recently. The uptrend in Wall Street forecasts for S&P 500 profits is strong, confirming evidence of this improvement.