Stocks may increase, but the earnings outlook is getting darker

Traders respond after closing time on the New York Stock Exchange (NYSE) on August 5, 2019 on Wall Street in New York City.

Johannes Eisele | AFP | Getty Images

Below the record-setting rally lies a worrying revenue trend that is "unusual and rarely good" for the stock market, UBS warned.

S&P 500 companies now expect to increase revenues by less than 1% year over year, compared with a 23% growth rate just 1[ads1]4 months ago, the bank pointed out. Historically, falling earnings expectations were not good for equities, as the last six times over the past 35 years have seen compression in stock valuation and fall in the S&P 500, UBS said.

"There is no debate about the S&P 500's future earnings: a contraction seems imminent," UBS's stock strategist Francois Trahan said in a note Tuesday. "An actual contraction in future earnings usually spells a difficult backdrop for the overall stock market."

The Dow Jones Industrial Average hit another record close on Tuesday, while the upturn in the S&P 500 appeared to have taken a break with the index little changed in the session. Revenue for the S&P 500 is expected to decline by 3.1% for the third quarter, after growing by more than 3% in the second quarter, according to data from Refinitiv.

While corporate earnings season has been generally better than expected as 75% of S&P 500 companies reported top analyst expectations, nearly one-third of companies, or 164, provided lower earnings guidance, compared to just 68 of them at the beginning of the year. year, said UBS.

The breadth of expectations is just as worrying, "Trahan said." The most disturbing part of all this is that it seems unlikely that the earnings picture will improve anytime soon. "

When future earnings fell in fourth quarter 2018, the market suffered a brutal correction with the Dow and the S&P 500 Trahan experienced its worst December since the Great Depression.

"They finally came back, but the correction, no matter how short it was," Trahan said. ]

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