Peak Earnings: Companies Furiously Guide Earnings Estimates Lower

At what point does the profit bubble pop? Based on corporate guidance, perhaps it already has.

Amid trade tensions, the rising US dollar, and a clear slowdown in Asia and Europe CEO sentiment has gone sour. As a result, Companies Are Furiously Guiding Down Analyst Earnings Estimates.

At what point does the profit bubble pop? Ever since Caterpillar Inc. mentioned a “high water mark” in growth, Wall Street has been on alert.

To date, the worries have been unfounded. Earnings soared 24 percent in the first quarter and did it again in the second. And while nothing is likely to prevent another blowout quarter in the third, one trend bears watching: the rate at which executives are guiding down forecasts.

Led by high-profile warnings from Netflix Inc. and Applied Materials Inc., the number of S&P 500 companies saying profits will trail analyst estimates outnumbered those saying they’ll beat them by a ratio of 8-to-1 in the third quarter. That’s the most in Bloomberg data going back to 2010.

Bucking the Trend

In a game of "beat the street" analysts continually guided earnings estimates lower. Now despite caution from companies, they are suddenly guiding earnings estimates higher.

Why?

It's the only way to justify absurd valuations.

The P/E ratio is 16.8 times forward guidance.

CAPE - Shiller PE

In contrast to the forward PE, the current Shiller PE Ratio is 33.49.

The only time the cyclically-adjusted PE was higher was during the dot-com bubble. But unlike now, there were plenty of companies with low PEs and excellent profits in 2000.

Energy companies were a standout example. Now, we are in a "damn near everything bubble". Affectionately called the "everything bubble".

Gold is now one of the few and far between non-bubble standouts. Some might even disagree with that.

Mean Reversion

Earnings are mean reverting. The problem is a matter of timing.

One keeps having to ask, what more is coming? Trump gave earnings a big boost with tax cuts. And companies have been on an enormous debt spree, borrowing money to buy back shares, inflating prices.

What's next?

Peak Earnings

If there is no additional boost to earnings, then nothing more is coming. Earnings have peaked.

The pending stock market bust rates to be a doozie.

That does not imply a crash. Rather, I believe it's more likely stocks have negative returns nearly every year for seven to ten years.

Mike "Mish" Shedlock

Comments
No. 1-6
kram
kram

Can anyone tell me ... Why NOT a crash? Even if it is a slow-motion crash over years like in Japan.

After all, everytime such extremes were reached, some black swan swept in (obviously unseen, since it is, by definition, a Black Swan) and a crash occurred.

So, why NOT a crash? No one seems to have mentioned it as a possible option.

RB2
RB2

Yah Bberg real reliable news source...let's let the number come out and then judge.

2banana
2banana

Soon...boring stocks of companies that actually produce something and pay a dividend might be sexy again.

shamrock
shamrock

Everything's coming up gold, the same way it has for the last 40 years.

thimk
thimk

so the pig is finally exiting the python?

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