US stocks face headwinds

A disappointing earnings season will weigh heavily on US stocks.

751_Markets

"For all the hand-wringing" about turmoil in Greece and China, US stocks are doing well, says John Kimelman in Barron's. The S&P 500, the world's leading stockmarket, is only just below its all-time high set in May. Last week's uptick in China calmed investors' nerves, and now they are hoping for a solid earnings season to give stocks a further boost. But they may be out of luck.

S&P 500 companies' second-quarter earnings per share are currently expected to fall by 4.5% year-on-year. That would mark the first decline since 2012. It would be due to energy firms, which account for almost 10% of the market and have been buffeted by the steep fall in the oil price over the past year. Nor does it help matters that the dollar has risen over the past year: S&P 500 firms make around half their sales overseas. Strip out the oil sector, and earnings growth of 2.2% is expected to be the result.

Still, estimates may have "come down to the point that Corporate America can probably clear the hurdle", says Johanna Bennett, also in Barron's. Companies are good at managing expectations downwards, and then surprising the markets by eclipsing their lowered benchmarks. That cheers investors and helps buoy the market. Before the first quarter, for example, analysts had anticipated a 4.9% annual drop in profits, but in the end they actually grew by 0.8%.

Yet while profit growth may be better than expected, "it's still going to be a relatively low number", says Daniel Morris of financial services group TIAA-CREF. And it's hard to see it being enough to bolster equities, especially when the market is so expensive. The market is on a price-earnings (p/e) ratio of 18 and a cyclically adjusted p/e of 27, miles above the long-term average.

One important reason earnings per share have looked so solid in recent years is record share buybacks. But this tailwind is set to fade as interest rates rise because so many companies have borrowed money to buy their stock back.

Stocks tend to wobble as dearer money approaches, so the first interest-rate increase in almost ten years due in the autumn is likely to unsettle investors in the next few months. Given all this, it's no wonder more and more people reckon US stocks could be due a correction. As Bloomberg points out, short sales on the New York Stock Exchange have reached their highest level since the financial crisis.

Recommended

Kieran Heinemann: the history of shareholder capitalism
Investment strategy

Kieran Heinemann: the history of shareholder capitalism

Merryn talks to Kieran Heinemann, author of Playing the Market: Retail Investment and Speculation in Twentieth-Century Britain, about the history of t…
17 Sep 2021
Why it pays to face up to your investment mistakes
Investment strategy

Why it pays to face up to your investment mistakes

Buying stocks can be a complicated business. But selling stocks can be tricky, too – even if you sell for the right reasons. Max King explains how to …
17 Sep 2021
Are stockmarkets heading for a fall?
Stockmarkets

Are stockmarkets heading for a fall?

America’s S&P 500 stockmarket index has gained 30% over the past year. Valuations may be high, but that doesn't necessarily mean investors should sell…
17 Sep 2021
A nightmare 1970s scenario for investors is edging closer
Investment strategy

A nightmare 1970s scenario for investors is edging closer

Inflation need not be a worry unless it is driven by labour market shortages. Unfortunately, writes macroeconomist Philip Pilkington, that’s exactly w…
17 Sep 2021

Most Popular

The times may be changing, but don’t change how you invest
Small cap stocks

The times may be changing, but don’t change how you invest

We are living in strange times. But the basics of investing remain the same: buy fairly-priced stocks that can provide an income. And there are few be…
13 Sep 2021
Two shipping funds to buy for steady income
Investment trusts

Two shipping funds to buy for steady income

Returns from owning ships are volatile, but these two investment trusts are trying to make the sector less risky.
7 Sep 2021
How to stop recurring subscriptions becoming a drain on your money
Personal finance

How to stop recurring subscriptions becoming a drain on your money

Tracking and pruning subscriptions isn’t as easy as it sounds. Here's how to take charge.
14 Sep 2021