10 months ago • 1 min
Leading indicators tend to provide information about the future growth of earnings. So, by paying attention to them, you can get useful signals as to where earnings – and ultimately, stocks – are likely to go. Right now, some of those leading indicators tracked by Morgan Stanley have been collapsing and that suggests a sharp decline in earnings ahead.
That’s not what the consensus expects at all, however. This chart shows the difference between the expectations from analysts and the forecasts from those leading earnings indicators, which include measures of economic activity from the Philadelphia Federal Reserve, business confidence, supplier deliveries, and wage trackers. The more negative the blue line, the more optimistic analysts are relative to the data. And right now, it shows the biggest divergence since 2008, with analysts expecting earnings growth to be around 25% higher than the leading indicators would suggest. Put more simply, leading indicators say earnings are about to tumble, while analysts still expect a surge.
Historically, this hasn’t been a good sign for stocks. In 2002, a similarly large divergence was followed by a drop of 34% for the S&P 500. In 2008, it preceded a 49% crash. Now, that doesn’t mean that the same thing will happen this time around – some say investors are already looking past the coming weakness in earnings. But it does show that analysts are very optimistic about future earnings growth, compared to the data. Those analysts might be walking on incredibly thin ice, because a bad surprise could lead to a big repricing of stocks.
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