Wall Street Braces for a Corporate Profit Slowdown

The stock market is currently undergoing significant adjustments as investors brace for a potential downturn in corporate profits. Analysts from JPMorgan have raised concerns that the combination of sustained high interest rates and deteriorating consumer finances could lead to a decline in corporate earnings. They predict that consensus expectations of a 12% forward earnings-per-share (EPS) growth are overly optimistic and should be revised downward. The bank warns that refinancing approximately $800 billion of corporate debt maturing in 2025 at current rates could reduce S&P 500 EPS by about $3.

This cautious outlook is echoed by recent market behaviors. During the latest earnings season, companies that missed profit expectations saw their stock prices suffer significantly, underperforming the S&P 500 by an average of 5.7% on the first day post-earnings. This marks the worst performance in a year and the second-worst since 2017, indicating heightened sensitivity among investors to earnings reports.

Adding to the complexity, the market has shown a muted response even to companies that surpassed profit estimates. Despite strong earnings reports, concerns over the Federal Reserve’s monetary policy and rising interest rates have overshadowed positive corporate performance, leading to a 2.3% decline in the S&P 500 since the onset of the earnings season.

Conversely, some investment firms maintain a more optimistic perspective. Richard Bernstein Advisors suggests that the market is approaching a “once-in-a-generation” buying opportunity, anticipating a broad acceleration in corporate profits across various sectors. They project S&P 500 earnings growth to pick up by 10%-15% through 2024, driven by a robust economy and increasing corporate earnings momentum.

In summary, the stock market is at a crossroads, with divergent views on the trajectory of corporate profits. While some analysts caution about potential declines due to high interest rates and consumer financial strain, others foresee a resurgence in earnings growth, presenting potential opportunities for investors.