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 But while that probably protects Wall Street from another vicious
downdraft like the one that came with the start of the year, the
return to positive earnings growth is unlikely to drive prices
sharply higher, and buying stocks now with the market back near its
record high could prove a rough bet.
"There’s no clear driver that I can see that is going to ignite
growth in the real economy. We continue to limp along," said Kim
Forrest, senior equity research analyst at Fort Pitt Capital Group
in Pittsburgh.
The S&P 500 tech sector on Friday posted its largest percentage
decline in 11 weeks after Microsoft and Alphabet both missed
analysts' expectations.
However, the index overall was doing something close to nothing, and
is expected to remain in a tight range. Investors are not willing to
pay much more for earnings that are expected at best to inch up for
the year.
In that environment, investors are likely paying as much as they are
willing to pay for stocks, said Forrest.
The S&P's forward price-to-earnings ratio stands at 17.8, meaning
investors are paying nearly $18 for every $1 in expected earnings
over the next 12 months. That is the highest since 2004 and sharply
above the average 15 level over the past 30 years, according to
Thomson Reuters Datastream data.
EARNINGS BOTTOMING
Reported and estimated earnings for the S&P 500 are seen down 7.1
percent in the first quarter from a year ago, after having declined
2.9 percent and 0.8 percent year-on-year in the previous two
quarters. The second quarter of this year is also expected to post a
contraction, though a much smaller one at negative 2.3 percent.
Earnings are then expected to post gains of 4.3 percent and 10.3
percent in the third and fourth quarters, leaving the gains for the
full year shy of 2 percent, according to Thomson Reuters I/B/E/S
data.
The S&P 500 is already up more than 2 percent this year, meaning
that any further gains would come at the expense of a higher
multiple.
“The overall earnings guidance in some of the reports has
disappointed and the forward guidance is not as positive as we would
hope given the overall expectations that we are going through the
worst of it now," said Alan Gayle, director of asset allocation at
RidgeWorth Investments in Atlanta.
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The weaker-then-expected results from Microsoft and Alphabet, the
second- and third-largest U.S. companies by market capitalization,
add to a list of underwhelming reports from the likes of IBM, Intel
and Nike.
The S&P, however, has risen more than 15 percent from its 2016 low
hit in February and stands less than 2 percent away from its record
close set almost a year ago.
"You’ve got to be a little more cautious here about stocks given the
big rally," said Andrew Slimmon, portfolio manager at Morgan Stanley
Investment Management in Chicago.
"The estimates have beaten a little but it’s reaffirmation of very
anemic earnings growth year over year. At this juncture, we are
setting up for a repeat of last year, which is barely positive
year-over-year earnings growth."
More than 800 companies from micro- to large caps report earnings
next week. The headline of the list is Apple, expected to report
Tuesday at 5 p.m. EDT. Over the past eight reporting quarters, the
stock has moved on average 4.5 percent on any direction after
earnings.
Also reporting next week are Facebook, 3M, MasterCard, United
Technologies, UPS and AT&T.
(Additional reporting by Lewis Krauskopf, Chuck Mikolajczak and
Caroline Valetkevitch; Editing by Nick Zieminski)
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