Wall Street Sees Earnings Forecast Declines as S&P 500 Slips 4% in September

Amid concerns over the impact of surging Treasury yields on equities, the downward revisions in S&P 500 earnings forecasts are adding to investor unease.

Nicholas Colas, co-founder of DataTrek Research, noted that after weeks of positive or steady adjustments to 2023 and 2024 S&P 500 earnings projections by Wall Street analysts, last week saw a reversal in this trend. This shift might have played a less-recognized role in the recent market sell-off.

During the past week, Wall Street trimmed its third-quarter S&P 500 earnings estimate to $55.74 per share, a 0.6% decline from the previous week, effectively nullifying all the upward revisions of the past seven weeks. For the fourth quarter, analysts reduced their forecast by 0.4% to $57.85 per share, essentially bringing it back to where it stood in June.

This change in earnings forecasts marks a departure from the earlier optimism spurred by rising estimates, according to DataTrek. Colas pointed out that many trading algorithms consider earnings forecast revisions as a significant factor.

“While small earnings estimate revisions don’t usually matter, trends in this data sometimes do,” he explained. “We expect to see further cuts in the week ahead as analysts set their final Q3 estimates.”

The S&P 500 managed a slight gain on Monday, but it still registered a 3.8% loss for September, making it the third consecutive weekly decline. Most sectors within the S&P 500 saw losses this month, with only energy and utilities showing gains. Utilities were up by 1%, while energy stocks rose by 2.5%, thanks in part to higher oil prices in September.

The recent slide in the S&P 500 has been attributed in part to rising bond yields, which have pressured equity valuations following the Federal Reserve’s policy meeting in late September. The yield on the 10-year Treasury note rose to its highest level since 2007 after the Fed signaled its intent to raise interest rates and maintain them at higher levels for longer than previously expected.

Higher bond yields translate to increased borrowing costs, which can burden companies and their earnings.

Regarding corporate earnings expectations for the coming year, DataTrek highlighted downward revisions. Wall Street analysts cut their 2024 earnings estimate for the S&P 500 by 0.3% last week to $247.90 per share, marking the first reduction in nine weeks.

For the first half of next year, analysts lowered their earnings estimate for the S&P 500 to $57.93 per share for the first quarter and $60.90 per share for the second quarter.

Despite the uptick in Treasury yields, U.S. stocks managed to end higher on Monday. The Dow Jones Industrial Average inched up 0.1%, while the S&P 500 rose by 0.4%, and the Nasdaq Composite advanced by 0.5%.

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