Financial Professionals

April 8th, 2018

Uphill Battle for Stocks?


Technology stocks are under mounting pressure, and the S&P 500 remains in correction mode. The threat of a trade war is growing. Investors are understandably getting more skittish by the day.

Those are the headlines of the day in the financial world, and they are a source of worry for many. But I don’t actually view the dual risks of tech regulation (“techlash”) and a trade war as the biggest hurdles to big positive returns from equities in 2018. In my view, there’s a bigger hurdle for stocks to clear this year – earnings expectations.

Strong Earnings, but Even Stronger Earnings Expectations

As of this writing, the estimated earnings growth rate for the S&P 500 in the first quarter is +17%, which (if it stands) would mark the highest quarterly earnings growth rate since Q1 2011 (+19.5%). So, we could be looking at the highest earnings growth rate in seven years. That’s big, particularly this deep into an economic expansion, and also in light of some of the uncertainty afflicting the market of late.1

But we believe that there’s a bigger story here. A closer look reveals a near record-breaking increase in earnings estimates looking ahead for 2018. The first two months of the first quarter marked the biggest increase in the annual earnings-per-share (EPS) estimates since tracking began in 1996. From Dec. 31 through Feb. 28, the bottom-up EPS estimate for 2018 increased by a staggering +7.3%. CEOs appear to be as optimistic as ever.2

What’s more, rising earnings expectations aren’t limited to a certain part of the economy – the estimate increases are broad-based. At the sector level, nine of the eleven S&P 500 sectors recorded an increase in their bottom-up S&P 500 EPS estimates during the first two months of the quarter, led by:3

In short, U.S. corporations are hopeful that they’re going to make even more money this year than they originally thought. While that sounds – and is – wonderful, it also raises the bar for earnings, thereby increasing the probability that a company could fall short.

In my view, stocks perform best when corporations surprise the street with earnings that far exceed expectations – an event generally known as a “positive surprise.” The opposite holds true as well in my opinion, whereby stock gains tend to moderate when earnings aren’t quite what the street expected. To the extent that earnings throughout the year fall in-line or short of expectations, I think we could see some limitations to stocks’ upside potential in 2018.

Bottom Line for Investors

My bottom line for investors this week can be summed up with a single equation: Earnings Estimates + Tariffs + Tech Regulation = 2018’s “Wall of Worry”.

I’ve asserted that ‘too high’ earnings expectations could limit stocks’ upside potential, but it’s important to note that I still very much think stocks have upside potential. That’s because I think that tariffs, a high bar for earnings, and new regulations for the technology industry all contribute to the construction of a shiny, brand new, “wall of worry.” When I think of all the aforementioned negative forces together, I believe we’ll see a pattern develop that I’ve seen numerous times in my decades as an equity investor. It goes like this:

Stocks have an uphill battle with a few nagging headwinds, and we’ll be watching them develop closely. But I think we’ll see phases 4 and 5 in the not-too-distant future.

For more information on the current market landscape, you are invited to download our Market Strategy Report.4


1 Source – Zacks Investment Management’s Stock
Market Outlook Report

2 Source – Zacks Investment Management’s Stock Market Outlook Report

3 Source – Zacks Investment Management’s Stock Market Outlook Report

4 Zacks Investment Management reserves the right to amend the terms or rescind the free Stock Market Outlook Report at any time and for any reason at its discretion.

Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts as an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals.

This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional legal, tax, or accounting counsel. The information contained herein has been obtained from sources believed to be reliable but we do not guarantee accuracy or completeness. Publication and distribution of this article is not intended to create, and the information contained herein does not constitute, an attorney-client relationship. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole.

Any projections, targets, or estimates in this report are forward looking statements and are based on the firm’s research, analysis, and assumptions. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and suitability specifications. All expressions of opinions are subject to change without notice. Clients should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed in this presentation.

Certain economic and market information contained herein has been obtained from published sources prepared by other parties. Zacks Investment Management does not assume any responsibility for the accuracy or completeness of such information. Further, no third party has assumed responsibility for independently verifying the information contained herein and accordingly no such persons make any representations with respect to the accuracy, completeness or reasonableness of the information provided herein. Unless otherwise indicated, market analysis and conclusions are based upon opinions or assumptions that Zacks Investment Management considers to be reasonable.
2 Biggest Issues Affecting the Market Right Now
Q1 Earnings Season: Thumbs Up or Down?

Explore Zack’s Archives

Mitch's Mailbox
June 20th, 2024
How Much Actual Cash Should I Keep At Home?
Read more
Private Client Group
June 17th, 2024
Hiring And Wages Rise, Fed Sees Just One Rate Cut In 2024, Consumers Feel Better About Economy
Read more
Mitch on the Markets
June 17th, 2024
Is The U.S. dollar Too Strong?
Read more
Mitch's Mailbox
June 13th, 2024
Will Growth Stocks Continue to Outperform?
Read more
Private Client Group
June 10th, 2024
Inflation Update, The ‘Wealth Effect’ And Consumer Spending, OPEC+ Oil Cuts
Read more
Mitch on the Markets
June 10th, 2024
Market Volatility Index Is Very Low—Is It Too Optimistic?
Read more

Daily financial tips directly
from the Zacks family.




I'm a Private Client I'm a Financial Professional