- Upward revisions to S&P 500 profit forecasts have provided crucial fuel for the stock market’s ascent to new record highs.
- US equities are surging so much, so quickly, that some Wall Street strategist year-end forecasts have already been surpassed.
That’s because upward revisions to profit forecasts have been one of the main drivers of those equity gains. After all, earnings growth has been the undeniable driving force of stock gains throughout much of the 8 1/2-year bull market, and those positively adjusted estimates have given bulls even more of a reason to buy.
At the root of this surge in earnings forecasts is the recently passed GOP tax bill, which Wall Street agrees will boost the bottom lines for many companies. Whether those firms are simply paying a lower tax rate than before, or because they’re also getting a repatriation tax holiday, the consensus is that the tax plan will drive profit expansion.
This chart tells you everything you need to know about this dynamic. As S&P 500 forward 12-month earnings-per-share (EPS) forecasts have climbed, so has the level of the benchmark. They have been closely synced since 2015, and have been perhaps more closely linked than ever in recent months.
“Tax reform has only recently started flowing through to consensus numbers,” Mike Wilson, Morgan Stanley‘s chief US equity strategist, wrote in a client note. The chart “confirms this suspicion, showing the vertical jump in next-12-month EPS expectations that took place after December 15.”
The stock market has been so red-hot, in fact, that it’s already blown through many year-end forecasts made by strategists across Wall Street, despite it still being mid-January. That’s caused those same market experts to adjust their estimates higher, a practice that’s surely emboldening to bulls.
As of Wednesday, a group of 23 strategists are forecasting that the S&P 500 will finish 2018 at 2,950. That’s 6% above current levels, and almost 5% higher than the median estimate just three weeks ago.
“Tax cuts provide the visibility on earnings that markets love,” said Wilson. “Our 3,000 bull case looks more likely.”