When Will Company Profits Catch Up To The Bleak Reality?

When Will Company Profits Catch Up To The Bleak Reality?
Carl Hazeley

over 1 year ago1 min

Mentioned in story

Analyst estimates for S&P 500 companies’ earnings per share (EPS) have, for the most part, risen and risen over the past 10 years (black line). And share prices, for the most part, have moved in the same direction (blue line). Until recently, that is: the S&P 500 has tumbled 21% this year, even as analysts’ 12-month forward earnings estimates have continued to climb.

That’s surprising, given that you’d expect rising interest rates and high inflation – which make borrowing and spending more expensive – to weigh on company profits. Higher wages aren’t helping on that front, either.

The thing is, they still might: it takes a while for rising interest rates to hit company profits, since companies often keep their profits afloat in the short term by cutting costs, raising prices, or delaying spending. But eventually, those profits will start to decline.

The key question, then, is whether analysts are too optimistic about the next 12 months, or whether it’ll simply take longer for earnings to slow. If it’s the latter, that might make US stocks more appealing in the short term.

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