The Daily Prophet: Analysts Can't Stop Cutting Profit Forecasts

Connecting the dots in global markets.

Largely lost in the debate over how much credit President Donald Trump should or should not get for the performance of U.S. stocks this year is that perhaps the biggest reason for the rally is strong earnings. With more than 90 percent of the S&P 500 members having reported second-quarter results, earnings growth is tracking at a 12.2 percent pace year-over-year, much better than the 8.4 percent expected, according to Bloomberg Intelligence.

All sectors of the benchmark are on pace to beat projections, except energy, where less than 40 percent of companies topped earnings forecasts. Technology and health care continue to lead upside surprises, with more than 85 percent of tech companies and 75 percent of health companies posting better-than-expected earnings per share. Markets are forward looking, so it stands to reason that what happens next in earnings should have a big influence on the direction of stocks.

That’s where things start to look less rosy. Despite the positive earnings surprises in second-quarter results, S&P 500 profit estimates for the next four quarters continue to edge lower. Earnings per share forecasts for the index through mid-2018 have been reduced by 0.7 percent since the end of June, with the fourth-quarter bearing the brunt of downward revisions, according to Bloomberg Intelligence.

S&P 500 Next Four-Quarter EPS Estimate Change

Here's something the Federal Reserve probably doesn't want to see. The spread between U.S. and German five-year government note yields, which are narrowing amid continued tepid inflation, according to Bloomberg News’s Liz Capo McCormick. U.S. consumer prices rose just 1.7 percent in July from a year earlier, a fifth month of below-forecast data and down from as high as 2.7 percent as recently as February. At the same time that inflation in the U.S. underperforms Fed policy maker expectations, European growth and inflation are firming up. The U.S.-German spread, which reached 2.61 percentage points in December, will likely “converge” toward its half-decade average and reach about 1.5 percentage points before the end of the first quarter of 2018, according to Aaron Kohli of BMO Capital Markets. You can be sure that currency traders are watching this closely, as the shrinking spread has been partly blamed for the dollar’s weakness this year. So, any further convergence is likely to mean more pain for dollar bulls.

What once seemed a highly unlikely call on euro-sterling is gaining momentum, with two of the world’s leading banks predicting that Europe’s shared currency will attain and even go beyond parity with the pound for the first time, according to Bloomberg News’s Anooja Debnath. Morgan Stanley sees the pair at 1.02 by the end of March, which represents a 12 percent gain for the euro from current levels, while HSBC is sticking to its forecast that the euro will trade one-for-one against the pound by year-end. The euro has surged more than 6 percent against the pound this year amid speculation that the European Central Bank will announce a tapering of bond purchases by autumn. By contrast, the pound is being held down by uncertainty surrounding Brexit negotiations. “In euro-sterling we’ve had a very strong conviction, and it’s one of the biggest forecasts I ever remember making on a major currency,” said David Bloom, HSBC’s London-based global head of currency strategy. That’s “a 20 percent move and that’s quite something. It’s very unusual that we make such, what was at that time, an outrageous forecast” but “we are roughly half way there and we believe in it,” he said. Bloom first made his parity call a year ago, when the euro was around 83 pence. HSBC predicts the euro and the pound ending this year at $1.20, which are both “strong views,” he said.


The nation’s peso, stocks and bonds all rallied as President Mauricio Macri’s program to overhaul the Argentine economy after more than a decade of import controls and currency restrictions received a boost after his party’s candidates did better than expected in nationwide primaries on Sunday. Concern had mounted over the past few weeks that a strong showing by former President Cristina Fernandez de Kirchner might embolden her to run again for president in 2019, jeopardizing Macri’s market-friendly reforms, according to Bloomberg News’s Carolina Millan and Charlie Devereux. The peso dropped 10 percent after she announced her run in June. On Monday, though, the peso rose 3.1 percent to 17.12 pesos per dollar, the strongest in four weeks. Equities, especially banks and energy, rose as much as 11 percent. The difference between Argentina government bond yields and those on U.S. Treasuries shrank as much 27 basis points, according to JPMorgan’s EMBIG diversified index. "These results reassure investors that her chances of becoming president again are extremely remote at this stage," said Kevin Daly, a portfolio manager at Aberdeen Asset Management, which manages $11 billion in its global emerging market debt fund. "It would really take a collapse over the next several years in terms of the economy for her to regain any kind of momentum."

Add Pacific Investment Management Co. to the expanding list of investors backing emerging-market local bonds. Pimco said Monday that the local debt market will become much larger, deeper and more liquid as countries including China and Egypt are likely added to benchmark indexes, according to Bloomberg News’s Aline Oyamada and Selcuk Gokoluk. That will increase the attractiveness of assets that are already being boosted by a slumping U.S. dollar, one of the reasons Ashmore group, BNP Paribas Asset Management and Schroders Plc are positive on developing-nation debt. Further gains in emerging-market sovereign local bonds would come on top of a 7.4 percent rally since the end of 2016, the strongest start to any year since 2010, when a Bloomberg gauge for the asset class was initiated. Investors’ hunt for yield amid suppressed rates in industrialized nations has boosted the appetite for riskier assets this year, while faster growth in developing nations and stable political backdrops have also lent support.


You’d have to go back to February to find the last time monthly U.S. retail sales data met or exceeded forecasts. Will July break this disappointing trend? We’ll find out Tuesday in a report that the economists at Bloomberg Intelligence are calling the most important data point of the week. The median estimate in a survey of economists by Bloomberg News is that retail sales rose 0.3 percent last month after falling 0.2 percent in June. Sluggish retail sales growth has hurt the earnings and shares of retailers. J.C. Penney Co., Macy’s Inc., Kohl’s Corp. and Dillard’s Inc. have all reported a decline in sales for the second quarter. J.C. Penney also posted a deeper loss than analysts expected -- hurt by clearance sales -- sending the shares on their worst decline in more than four years on Friday.

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