Souring Profit Outlooks Cast Shadow on S&P 500's Rally: Bloomberg

Despite a strong earnings season with the majority of S&P 500 companies exceeding profit expectations, the sustainability of the recent market rally is being questioned due to increasingly pessimistic profit outlooks, according to a report by Bloomberg.

While 79% of S&P 500 firms have beaten profit estimates this earnings season, the muted market reaction suggests that investors are skeptical about future growth prospects. Weaker-than-expected guidance has led to stock prices being punished, with the median stock outperforming the index by less than 0.1% on results day – the smallest margin since late 2020.

"There’s a substantive level of optimism baked in, and subsequently, considerable downside if disappointments arise," Keith Buchanan, senior portfolio manager at GLOBALT Investments, told Bloomberg. He emphasizes the critical importance of guidance this season, given the high valuations of stocks.

Only 18% of S&P 500 companies issuing guidance through April provided an outlook that exceeded estimates, the second-lowest reading since the pandemic. This cautious approach reflects concerns over slowing US economic growth, persistent inflationary pressures, and uncertainty surrounding potential interest rate cuts.

Several major chipmakers, including Intel Corp. and Advanced Micro Devices Inc., have issued disappointing forecasts, contributing to a decline in the Nasdaq 100 Index. Concerns also exist around the consumer sector, with companies like Starbucks Corp. reporting falling sales and lowering their full-year revenue growth forecasts.

“We certainly remain vigilant on guidance with some of the consumer-related companies in particular, and that lower-end consumer seems to be under a bit of pressure,” Mona Mahajan, senior investment strategist at Edward Jones, told Bloomberg.

Investors are awaiting forecasts from major US retailers, such as Walmart Inc. and Target Corp., as well as the latest consumer sentiment data, for further insights into the health of the consumer sector.

The report suggests that the future trajectory of the S&P 500 hinges on either a significant improvement in profit outlooks or a decline in interest rates.