In the past six months, Wall Street analysts have continuously lowered the eps forecasts for 2025, with the energy, materials, and consumer sectors being severely affected.
According to FactSet, Wall Street analysts have downgraded the overall earnings per share (eps) expectation for 2025 by 0.5% in the last six months, from $276 in June to $273. Meanwhile, the sales expectation has also been reduced by 0.3%. The speed of the decline in eps expectations has exceeded that of the sales expectations, impacting Wall Street's profitability outlook. Typically, a decline in sales leads to a decrease in profit margins, as some company expenses are fixed and cannot be cut.
The decline in expected eps occurs among all companies in the s&p 500 index. According to Citi, the expected eps for the 493 companies in the s&p 500 index excluding the 'seven giants' has decreased by 5.5% to $208 in 2025. However, nvidia, microsoft, amazon, meta platforms, google A, apple, and tesla are in the early stages of benefiting from other companies' spending on ai. For example, nvidia recently exceeded profit expectations and raised its financial guidance.
The energy and cailiaohangye sectors are the main industries where earnings expectations have declined, with expected eps falling by 18% and 6%, respectively. Due to a slowdown in global economic growth, non-OPEC countries have increased oil production, leading to a decline in oil prices over the past six months. The sales of cailiaohangye (including chemical manufacturers, steel manufacturers, and copper miners) are very sensitive to fluctuations in economic output, especially recently as the economic growth has slowed.
The economy is also a factor affecting the consumer goods industry's decline in earnings expectations by 2.4%.
It is worth noting that the decline in earnings expectations is a typical phenomenon. According to Citigroup data, over the past 20 years, analysts have adjusted next year's earnings expectations downwards by an average of about 6% within a year.
However, this negative trend is worth attention, especially in the context of a potential recession. The labor market is weakening, and consumer spending is also declining. Meanwhile, interest rates remain relatively high. Although the Federal Reserve lowered rates in September, interest rates are still close to recent peaks and far from zero interest levels (which were at zero in 2021). High interest rates take time to fully impact consumer and business spending.
Even if the downward revisions no longer continue, the earnings expectations have already appeared unfavorable to the stocks market. According to data from morgan stanley, the proportion of companies expected to have increased earnings over the next year is now roughly equal to the proportion of those expected to have decreased earnings, whereas a few months ago, the proportion of companies with upward revisions was greater than that of those with downward revisions. Given the strong correlation between earnings revisions and s&p 500 performance, data from morgan stanley indicates that the s&p 500 index should be around 5300 points, down 16% from the current 6095 points.
The market decline may not be so extreme. Data from morgan stanley does not show a complete correlation between earnings revisions and the stock market. The market may drop by 10%, which would be a technical correction, and if the downward revision slows, the market may recover.
Nevertheless, there is a significant risk of a market decline. However, the stock market typically does not crash suddenly. Such a decline requires some sort of catalyst, such as a major company releasing a particularly disappointing quarterly report, the Federal Reserve indicating it will not cut interest rates as expected, or disappointing economic policies.
In line with this, the current pe of the s&p 500 index is about 22.5 times, close to the expected earnings for the next 12 months at 22.5 times, which is the highest level in the past three years. If there are any cracks in earnings expectations, stocks will appear to be significantly overvalued.
morgan stanley's chief analyst for usa stocks, Mike Wilson, stated: "We do see that relative to current levels, there may be very modest compression space for valuations." He pointed out the fact that economic growth is slowing and stock prices are diverging from earnings levels.
That said, do not let the market correction catch you by surprise.
Editor/Lambor
