MW Stock market's September drop may be tied to more than a surge in Treasury yields, says DataTrek
By Christine Idzelis
Cuts to earnings forecasts are make a comeback on Wall Street; S&P 500 falls nearly 4% in September
As stock-market investors worry about the damage to equities being inflicted by a jump in Treasury yields, revisions to S&P 500 earnings forecasts may also be souring sentiment.
"After several weeks of seeing Wall Street analysts increase or at least maintain their 2023 and 2024 S&P 500 earnings estimates, the trend reversed to the downside last week," said Nicholas Colas, co-founder of DataTrek Research, in a note emailed Monday. "This may have played an underappreciated role in last week's selloff."
Last week Wall Street cut its third-quarter earnings estimate for the S&P 500 to $55.74 a share, down 0.6% from the prior week, "erasing all the upside revisions" over the past seven weeks, according to the note. For the fourth quarter, analysts last week lowered their forecast by 0.4% to $57.85 a share, reducing Wall Street's estimate to "essentially where it was at the start of June," Colas said.
The cuts to earnings forecasts marks a shift from earlier market commentary on "the recent upswing in estimates" bringing fresh optimism about corporate profits, according to DataTrek. Colas said that many trading algorithms use revisions to earnings forecasts as an input.
"While small earnings estimate revisions don't usually matter, trends in this data sometimes do," he said. "We expect to see further cuts in the week ahead as analysts set their final Q3 estimates."
The S&P 500 was trading slightly higher around midday Monday, bringing its September loss to 3.9% in the last trading week of the month, FactSet data show. The index fell the past three straight weeks, finishing Friday at the index's lowest closing value since June 9, according to Dow Jones Market Data.
Most of the S&P 500's 11 sectors are down so far in September, with only energy and utilities posting month-to-date gains around midday Monday. The utilities sector was clinging to a 0.5% gain month to date, while the S&P 500's energy stocks were up 2.4% amid higher oil prices (CL00) in September.
The S&P 500 on Friday logged a third-straight weekly decline as rising bond yields dented equity valuations following the Federal Reserve's policy meeting that ended Sept. 20. Ten-year Treasury yields rose to the highest levels since 2007 after the Fed signaled it might raise interest rates again this year and then keep them higher for longer than markets appeared to anticipate.
The yield on the 10-year Treasury note BX:TMUBMUSD10Y was trading up about eight basis points around midday Monday at 4.52%. That's after rising three straight weeks, according to Dow Jones Market Data. Higher yields translate to borrowing costs, which can weigh on corporations.
As for corporate earnings expectations for next year, DataTrek pointed to revisions downward.
Wall Street analysts lowered their 2024 earnings estimate for the S&P 500 by 0.3% last week to $247.90 a share, the first reduction in nine weeks, according to DataTrek.
For the first half of next year, they cut their earnings estimate for the U.S. stock-market index to $57.93 a share for the first quarter, while reducing their second-quarter forecast to $60.90 per share, according to DataTrek.
U.S. stocks were mostly trading up in midday trading on Monday, attempting to bounce after all three major benchmarks opened down. The Dow Jones Industrial Average DJIA was down than 0.1% around midday, after briefly flipping positive, while the S&P 500 SPX rose 0.2% and the Nasdaq Composite COMP advanced 0.3%, FactSet data show, at last check.
-Christine Idzelis
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(END) Dow Jones Newswires
September 25, 2023 12:50 ET (16:50 GMT)
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