Although the S&P 500 index has broken through the important 5000 point mark this month, executives of US listed companies are generally cautious about the outlook and are actively trying to lower market expectations to prevent stock prices from falling due to high expectations.
According to data from Bank of America, only 40% of companies that have released performance forecasts for this fiscal quarter have provided guidance on profit prospects that exceed market expectations. If this trend continues, it will record the lowest relevant proportion since April 2020. At that time, the outbreak of the epidemic was putting the market in unprecedented uncertainty. According to data compiled by the media, more than one-third of American companies that provided outlook guidance in January released forecasts lower than analysts' expectations, the highest proportion since March 2023.
This situation is partly due to concerns among US corporate executives that the US economy will cool down. Due to the latest inflation data showing inflation stickiness, traders have recently lowered their expectations for the Federal Reserve's interest rate cut this year and are concerned about whether the Fed can achieve a soft landing in the economy. Veronica Clark, an American economist at Citibank, wrote in a research report that last week's economic data "confirmed that a soft landing has not yet been achieved.". They analyzed that the core CPI in the United States rose by 0.39% month on month in January, "indicating that inflation levels are still higher and more unstable than before the pandemic, and six months of core PCE inflation may rise from 1.9% to 2.4%. The decline in retail sales and manufacturing output, as well as the continued rise in unemployment claims, also indicate that the economy is softening. Higher inflation will make it harder for the Federal Reserve to cut interest rates, which in turn increases the possibility of an economic recession." Citigroup predicts that the Federal Reserve will cut interest rates by 25 basis points for the first time in June, while the economy will enter a more pronounced recession.
The disclosed financial report can also be described as mixed. According to data from JPMorgan Chase, among nearly 70% of S&P 500 index constituent companies that have released their quarterly financial reports last year, 78% of them exceeded expectations in profit, a year-on-year increase of 5%. However, data also shows that after excluding the "Big Seven" in the US stock market, the earnings per share growth of US companies in the fourth quarter of last year decreased by 4% year-on-year. The commodity sector and healthcare sector performed weakly, while the non essential goods sector, technology sector, and communication services sector were the main driving forces for profit growth. Energy, materials, and utilities have experienced negative revenue growth at the industry level.
Willie Delwhite, strategist and founder of Hi Mount Research, said, "We don't know how and whether the US economy can sustain the delayed effect of interest rate hikes, and the pace of interest rate cuts is still uncertain. In addition, US companies are also facing geopolitical and election risks this year.". Taking these factors into consideration, adopting a cautious tone when providing profit prospects may be more beneficial and wise than ever before
Taking Deere&Co. as an example, this agricultural equipment manufacturer has lowered its net income guidance for this year to the level of earnings per share (EPS) of $27.20, which is 4% lower than market expectations. The annual total order value guidance released by delivery platform company DoorDash is only at the midpoint of analyst expectations.
Jack Ablin, Chief Investment Officer of Cresset Capital, also believes that many factors may affect the profitability prospects of US companies this year, including the speed of interest rate cuts, the ability to pass on costs to consumers, the convenience of obtaining capital, geopolitical factors, and the November US presidential election.
In addition, the higher than expected and lower than expected stock price performance of companies in this quarter has become another reason for executives to lower the threshold for financial reporting expectations. For companies that make too many promises but cannot fulfill them, risks have already emerged in this profit cycle, and investors quickly reward companies that exceed expectations and punish those that fall below expectations.
According to data compiled by the media, on the second day after the announcement of performance, stocks of S&P 500 index constituent stocks that exceeded expectations outperformed the benchmark by 0.8%, the highest level in a year. And those companies that did not meet expectations also fell behind the benchmark index by the highest amount in the past five quarters.
This means that for businesses, the pressure to not only meet but also exceed analyst expectations is greater than before. Abulin admitted, "At present, it is not an easy trading environment, and there are so many changing factors at both the micro and macro levels of the enterprise. The high cost of performance guidance is really high, and if things do not go according to plan, it will disappoint investors and make oneself suffer."