With bond yields jumping and inflation expectations surging, this would seem like a strange time for optimism to break out among Wall Street’s equities handicappers.
But that’s exactly what it has done. And the reasons offer a lens into what kept the stock market’s worst three-day decline since October from spinning further out of control this week.
It was hard to notice, but while markets were lurching, stock strategists at securities firms were busy jacking up their earnings estimates for S&P 500 companies. That brought profit projections from these top-down forecasters into alignment with a much bigger set of company analysts, the single-stock researchers who follow individual companies.
While nobody believes the published opinions of strategists are particularly meaningful to the day-to-day motion of share prices, the phenomenon illustrates a dynamic that’s been supporting equities for more than a year. Namely, the slow and almost invisible improvement in corporate profits that’s accompanied growing inflation anxiety and spotty data — and continues to put a floor under selloffs.
“It’s going to be challenging to have a deep correction when you have an economy that is very strong and earnings revisions that are still moving up at a brisk pace,” said Keith Lerner, chief market strategist at Truist Advisory Services. “That just provides a cushion for pullbacks, and that’s exactly what we saw this week.”
Dennis Debusschere, head of portfolio strategy at Evercore ISI, was one strategist who boosted his earnings estimates in the face of an equity rout triggered by inflation fears. Citing a faster-than-expected recovery in corporate activity, he raised his 2021 forecast for S&P 500 companies by $6 to $182 a share.
“Inflation is trending higher and supply chain disruptions are a potential threat to profitability, but management sentiment toward margins continued to climb higher,” he wrote in a note to clients earlier this week. “Until that trend reverses, strong topline growth and strong pricing power support” robust earnings, he said.
Slowly but forcefully, Wall Street has come to terms with corporate America’s resilience. Earnings that didn’t fall as much as feared during the initial pandemic lockdowns are now rebounding faster than expected. The net result: A profit recovery that was expected to take years is on track to be done by June, a span of just five quarters.
When this reporting season started five weeks ago, analysts’ 2021 earnings estimate for S&P 500 firms stood at $174 a share. After almost every firm crushed expectations, the expected income has increased 5.7% to $183.90 a share, a pace of upgrading that was the second fastest since Bloomberg began tracking the data in 2012, exceeded only by the 2018 cycle in…
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