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The high expectations of Wall Street are about to clash with reality



Wall Street's ever-optimistic forecasters expect business earnings growth to increase by mid-next year – views that are about to clash with reality as hundreds of companies report financial results and update investors on their outlook. through this ritual every three months: sharing accounts and holding conference calls where they sometimes offer their expectations for future quarters, what Wall Street calls "guidance." For this quarter, it starts with reports from several major banks on Tuesday.

Between these reports, executives continue to provide guidance, and try to push expectations higher or lower by speaking at conferences or other events so that official results do not offend investors.

Lately, they have done less of a mediation, and that may make this round of revenue more important than usual.

"Businesses start doing what they do when there is a lot of uncertainty, which just ceases to provide guidance," said Savita Subramanian, head of US equity strategy at Bank of America Merrill Lynch. "Companies just get dark."

During the three months ended in September, companies in the S&P 500 offered the least updates – positive or negative – to investors since 2000 according to the bank's analysts.

The "fierce uncertainty" referred to by Subramanian stems from many sources: signs that the economy and job growth are declining, evidence that the industrial sector may already be in a recession, and the trade war's toll on China, Japan and Germany.

Plus, politics and the 2020 presidential election have always been a distraction, but the development of investigations has made it more difficult to know where the policy will go.

On Friday, President Trump said the US and China had reached a temporary agreement to stave off a planned tariff increase on Tuesday. But the deal was counted and it would take several weeks to write, and did little to remove the uncertainty surrounding the economic battle between Beijing and Washington.

Regardless of the companies' reasons, the relative silence since the last reports means their stock investors. in too many bad news at once.

Then it is the case of the usually over-enthusiastic Wall Street analysts who assess stocks and try to predict where they are headed. Stock prices hang with expectations – not what just happened – and see the divisions more and more separate from reality.

Right now, the collective forecast is that profits for S&P 500 companies will jump more than 10 percent by 2020, a view that defies expectations of the economy to decline further.

"It doesn't look likely," said Ralph Davidson, head of global equity strategist at BTG Pactual, a Brazilian investment bank, about the earnings forecast. "We expect guidance to come down." In 2018, revenues jumped 22 percent following a sharp cut in corporate taxes, but it becomes clear that last year's wave was a one-off shock.

As the year went by and companies reported results, analysts cut the forecast down again and again.

Now they expect profits to have grown by just under 2 percent when the year is over. For the third quarter, which ended in September, analysts expect S&P 500 companies to report that their profits fell 3 percent .

But eventually, investors will have to turn their attention back to the fundamental question of whether profits will continue to grow and how quickly. And that can make the next few weeks rocky.

"I think we're going to see a wave of negative guidance on next year's revenue," said Subramanian of Bank of America. "And it may not be good for the market."


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