If you thought Wall Street’s forecasts for earnings were too bullish, then congratulations. You were right.
Earnings and expectations for earnings growth are arguably the most important drivers of stock prices in the long term.
Unfortunately, falling earnings growth expectations are not reliable for predicting the direction of stock prices in the short term. Indeed, in recent years, we’ve seen these expectations revised down repeatedly as stock prices have defied gravity and climbed to new record highs.
Since the middle of 2014, analysts have done almost nothing but cut their forecasts for near-term earnings growth thanks to falling oil prices and a strengthening dollar.
“The Q1 bottom-up EPS estimate (which is an aggregation of the estimates for all the companies in the index) dropped by 7.4% (to $US27.31 from $US29.48) during the first half of the quarter,” FactSet’s John Butters writes. “In fact, this marks the largest percentage decrease in the bottom-up EPS estimate for the S&P 500 for the first half of a quarter since Q2 2009 (-7.5%).”
And yet the stock market remains resilient with the S&P 500 closing at a record high of 2,096 on Friday.
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