Stocks’ Greatest Friend Might Have Climbed Too Far Ahead Of Trend

Stocks’ Greatest Friend Might Have Climbed Too Far Ahead Of Trend
Andrew Rummer

about 2 years ago1 min

Mentioned in story

Company profits have roared back from the coronavirus shock over the past 18 months, helping​​ support the price investors are willing to pay for stocks. But history suggests the profit rebound will struggle to continue for much longer.  

Over the very long term, earnings at companies in the benchmark S&P 500 have risen at a consistent 6.5% a year, as indicated by the diagonal purple line on the chart above. S&P 500 earnings are currently 20% above that long-term trend, a level that has consistently proven unsustainable in the past.

This data is backed up by observations from the current earrings season. As we approach the halfway point of US earnings season, Bloomberg data shows that 76% of the 198 S&P 500 members to have reported so far have beaten analysts’ profit estimates. While that’s nothing to sniff at, it’s a clear step down from last quarter, when an awesome 82% topped expectations.

It’s possible the best days of the profit renaissance are behind us, particularly if booming inflation encourages workers to press their employers for bigger pay bumps. Any slowdown in profit growth would reduce the attractiveness of stocks as an investment and prove a drag on a US stock market that’s already dropped 5% this year. 

Finimize

BECOME A SMARTER INVESTOR

All the daily investing news and insights you need in one subscription.

Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

/3 Your free quarterly content is about to expire. Uncover the biggest trends and opportunities. Subscribe now for 50%. Cancel anytime.

Finimize
© Finimize Ltd. 2023. 10328011. 280 Bishopsgate, London, EC2M 4AG