US Stocks Brace for More Hammering as Analysts Briskly Cut Third-Quarter Profit Estimates

The US stock market is bracing for another round of volatility as analysts have cut earnings estimates for the upcoming quarter. The fact that earnings had remained relatively resilient despite a fall in stock prices, signalling an upturn. However, Wall Street analysts are cutting profit estimates at a faster pace than usual, prompting investors to get ready for another stretch of volatility in the stock market., according to IANS.

"It's hard for us to argue the market is cheap ... We haven't yet seen the end of earnings resetting," said Rob Haworth, senior investment strategist at U.S. Bank, the agency reported.

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The third-quarter bottoms-up earnings-per-share estimate, an aggregate of consensus projections for individual companies in the S&P 500, fell by 2.5 per cent in July, according to FactSet. That is the biggest reduction during the first month of a quarter in more than two years and a larger decline than the historic average, Wall Street Journal reported.

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Stock Market (Representational Picture) PxHere

The market's valuation is back on the rise as well. After slipping from lofty levels at the beginning of the year, the S&P 500 is trading at 17.5 times expected earnings over the next 12 months, up from 15.3 in mid-June and slightly ahead of its 10-year average.

"It's not just fundamentals or growth, but what you're paying for those is ultimately what matters," said Ronald Saba, senior portfolio manager at Horizon Investments. "Valuations are going to matter more and more, especially in a slowing growth environment," Wall Street Journal reported.

Consumer and Producer Prices

In the week ahead, investors await reports on consumer and producer prices for the latest reading on inflation.

Recent data releases and corporate-earnings reports have flashed mixed signals about the economy's trajectory and whether a recession is on the horizon. Gross domestic product has contracted for two straight quarters, but Friday's robust jobs report showed unemployment remains low and the economy is adding jobs at a healthy clip.

Corporate-earnings expectations are falling. That means the stock market is again at risk of appearing expensive, even after this year's tumble, Wall Street Journal reported.

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People queue beside the bronze bull in the Financial district which has become a Wall Street icon in New York City, July 18, 2013. U.S. stocks continued to rise on Thursday, sending the Dow Jones Industrial Average and the S&P 500 to fresh all-time highs, boosted by upbeat economic data and corporate earnings. IANS

Wall Street often uses the ratio of a company's share price to its earnings as a gauge for whether a stock appears cheap or overpriced. By that metric, the market as a whole had been especially pricey for much of the past two years when easy monetary policy propelled major stock indexes to dozens of new highs.

That environment has disappeared. Worries about inflation and the path of the Federal Reserve's interest-rate increases have spurred tumult in markets, along with debate about the appropriate value of stocks. The S&P 500 has fallen 13 per cent in 2022, despite rallying 13 per cent since mid-June, Wall Street Journal reported.