Corporate profits have always been the biggest driving force behind the rise of US stocks. JPMorgan Chase warned in a report released on Monday that the biggest driving force behind this US stock market will face a slowdown. The bank stated that against the backdrop of high interest rates and deteriorating consumer financial conditions, corporate profits will decline.
JPMorgan Chase pointed out that the market generally expects the S&P 500 Index's earnings per share to grow by 12% in 2024, but this view is "disconnected" from the growing risks of reduced consumer savings, restrictive monetary policies, and rising geopolitical risks.
The consensus expectation of a 12% increase in earnings per share should be lowered, "JPMorgan Chase said.
Given the widespread expectation on Wall Street that corporate profits will achieve double-digit growth next year, any decline in corporate profits may have an impact on stock prices.
Multiple 'headwinds' will hit corporate profits
Firstly, keeping interest rates at a higher level for a longer period of time will drive up corporate interest expenses. JPMorgan estimates that the refinancing of $800 billion worth of corporate debt due in 2025 at current interest rates will result in a decrease of approximately $3 in earnings per share for the S&P 500 index.
Secondly, a slowdown in corporate revenue will have a more adverse impact on profits, partly due to consumer spending capacity reaching its limits. JPMorgan estimates that a 1% decrease in corporate revenue will result in a $2.25 decrease in earnings per share for the S&P 500 index.
JPMorgan Chase has warned that in the past year, corporate profit growth has almost stagnated, and if the business cycle shifts from a slowdown to a complete contraction, profit growth should turn negative. Since World War II, the earnings of S&P 500 index companies have decreased by an average of about 20% during recessions.
Another reason why corporate profits may slow down during the current period when interest rates exceed 5% is that corporate stock repurchases are slowing down, as the cost of borrowing to repurchase stocks has become too high. In the past decade of nearly zero interest rates, repurchase operations have been widely used, which has helped improve earnings per share.
Bank of America stated in a report on Monday that corporate stock repurchases have "significantly slowed down" in recent quarters, with a 30% year-on-year decrease in stock repurchases in the third quarter. The weakness of bond issuance will lead to continued weakness in stock repurchase plans.
In summary, JPMorgan Chase remains cautious about the outlook for US stocks as rising interest rates will lead to a decline in profits across multiple industries. After more than a decade of loose monetary policy, we have seen many known risks, but larger unknown risks have not yet surfaced, "said Bank of America.