{"id":7571,"date":"2018-04-08T19:47:52","date_gmt":"2018-04-08T19:47:52","guid":{"rendered":"http:\/\/zackspcg.com\/blog\/?p=7571"},"modified":"2022-02-26T13:15:19","modified_gmt":"2022-02-26T13:15:19","slug":"uphill-battle-for-stocks","status":"publish","type":"post","link":"https:\/\/zacksim.com\/blog\/uphill-battle-for-stocks\/","title":{"rendered":"Uphill Battle for Stocks?"},"content":{"rendered":"<p>Technology stocks are under mounting pressure, and the S&amp;P 500 remains in correction mode. The threat of a trade war is growing. Investors are understandably getting more skittish by the day.<\/p>\n<p>Those are the headlines of the day in the financial world, and they are a source of worry for many. But I don\u2019t actually view the dual risks of tech regulation (\u201ctechlash\u201d) and a trade war as the biggest hurdles to big positive returns from equities in 2018. In my view, there\u2019s a bigger hurdle for stocks to clear this year \u2013 earnings expectations.<\/p>\n<p><strong>Strong Earnings, but Even Stronger Earnings <em>Expectations<\/em><\/strong><\/p>\n<p>As of this writing, the estimated earnings growth rate for the S&amp;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\u2019s big, particularly this deep into an economic expansion, and also in light of some of the uncertainty afflicting the market of late.<sup>1<\/sup><\/p>\n<p>But we believe that there\u2019s a bigger story here. A closer look reveals a near record-breaking increase in earnings <em>estimates <\/em>looking ahead for 2018. The first two months of the first quarter marked the <strong>biggest increase in the annual earnings-per-share (EPS) estimates <\/strong>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.<sup>2<\/sup><\/p>\n<p>What\u2019s more, rising earnings expectations aren\u2019t limited to a certain part of the economy \u2013 the estimate increases are broad-based. At the sector level, nine of the eleven S&amp;P 500 sectors recorded an increase in their bottom-up S&amp;P 500 EPS estimates during the first two months of the quarter, led by:<sup>3<\/sup><\/p>\n<ul>\n<li>Energy (+18.9%)<\/li>\n<li>Telcos (+14.8%)<\/li>\n<li>Financials (+11.5%)<\/li>\n<\/ul>\n<p>In short, U.S. corporations are hopeful that they\u2019re going to make even more money this year than they originally thought. While that sounds \u2013 <em>and is<\/em> \u2013 wonderful, it also raises the bar for earnings, thereby increasing the probability that a company could fall short.<\/p>\n<p>In my view, stocks perform best when corporations surprise the street with earnings that far exceed expectations \u2013 an event generally known as a \u201cpositive surprise.\u201d The opposite holds true as well in my opinion, whereby stock gains tend to moderate when earnings aren\u2019t 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\u2019 upside potential in 2018.<\/p>\n<p><strong>Bottom Line for Investors<\/strong><\/p>\n<p>My bottom line for investors this week can be summed up with a single equation: Earnings Estimates + Tariffs + Tech Regulation = 2018\u2019s \u201cWall of Worry\u201d.<\/p>\n<p>I\u2019ve asserted that \u2018too high\u2019 earnings expectations could limit stocks\u2019 upside potential, but it\u2019s important to note that I still very much think stocks have upside potential. That\u2019s 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, \u201cwall of worry.\u201d When I think of all the aforementioned negative forces together, I believe we\u2019ll see a pattern develop that I\u2019ve seen numerous times in my decades as an equity investor. It goes like this:<\/p>\n<ul>\n<li>Phase 1: A negative (like tariffs, a trade war, and regulation) surfaces.<\/li>\n<li>Phase 2: Market participants fear the worst, and rush to price-in the worst-case scenario.<\/li>\n<li>Phase 3: Volatility ensues and talk of a bear market increases (we\u2019re at this phase today in my view).<\/li>\n<li>Phase 4: Over time, market participants realize that the feared negative did not turn out to be as bad as everyone originally expected.<\/li>\n<li>Phase 5: The market resumes its upward, longer-term trajectory.<\/li>\n<\/ul>\n<p>Stocks have an uphill battle with a few nagging headwinds, and we\u2019ll be watching them develop closely. But I think we\u2019ll see phases 4 and 5 in the not-too-distant future.<\/p>\n<p>For more information on the current market landscape, you are invited to download our Market Strategy Report.<sup>4<\/sup><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Technology stocks are under mounting pressure, and the S&amp;P 500 remains in correction mode. The threat of a trade war [&hellip;]<\/p>\n","protected":false},"author":3,"featured_media":7430,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[59,63,71],"tags":[],"class_list":["post-7571","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-financial-professionals","category-mitch-on-the-markets","category-private-client-group"],"acf":[],"_links":{"self":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/7571","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/comments?post=7571"}],"version-history":[{"count":1,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/7571\/revisions"}],"predecessor-version":[{"id":10881,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/posts\/7571\/revisions\/10881"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/"}],"wp:attachment":[{"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/media?parent=7571"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/categories?post=7571"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/zacksim.com\/blog\/wp-json\/wp\/v2\/tags?post=7571"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}