Analyst: Profit engine is just starting to accelerate! Is the "good times" coming for US stocks?

According to Zhitong Finance APP, currently, the pace at which the US stock market strategist raises the future one-year profit expectations for the S&P 500 index is faster than the pace at which they lower the expectations. This has driven a key indicator that tracks analyst revisions to rise significantly higher than the low point in November last year. Data shows that after reaching -70% at the end of last year, this indicator (which focuses on the expected earnings per share in the next 12 months) has approached +28%. This indicator is hailed as a leading indicator of profit prospects and may support the argument for a stock market rise in the coming year.

Michael Casper, a Bloomberg stock strategist, said that the revised data is a clear sign that the profitability situation is improving. In fact, Bloomberg data shows that the median increase in the S&P 500 index over the past four quarters after the earnings per share growth hit a low point is 5.1%.

Casper said, "This is good news for corporate profit prospects and stock market trends because this indicator is likely to have finally bottomed out. This means that more stocks are starting to see better prospects - the final positive reading will confirm that the prospects for 2024 are indeed more optimistic."

Therefore, although the earnings of the constituent companies of the S&P 500 index are expected to decline for the third consecutive quarter, the actual profit growth is improving after excluding the energy sector. BI data shows that as inflation and commodity prices fall, the profit expectations for the S&P 500 index tend to decline, but the profit expectations for the constituent companies of the S&P 500 index after excluding the energy sector are expected to recover in the second half of the year.

Although 9 out of the 11 industries in the S&P 500 index are expected to have their profit forecasts lowered next year, the expectations for two cyclical key industries (industrials and non-essentials) have turned positive, and the technology industry is also about to reach this encouraging threshold.

This is a key development because the industrial and non-essential industries that are closely related to the health of the US economy were one of the industries that led the slowdown in profit growth last year. This time, they are driving the recovery of profit prospects because many companies in these two industries have resumed economic activities after the outbreak of the pandemic. Of course, the energy industry is facing the greatest pain as inflation weakens and commodity prices fall.

Having said that, many people are still worried that an economic slowdown or recession may further drag down the stock market, thereby further reducing corporate profits, especially concerns about the hawkish stance of the Federal Reserve that may disrupt the upward trend. After the significant rise of large technology stocks this year, causing the stock market's price-earnings ratio to be too high and market concentration to reach extreme levels, this has sounded the alarm for some people.

Brian Frank, portfolio manager of Frank Value Fund, warned, "The biggest risk is that valuations are still too high. If the overall profit growth of the constituent companies of the S&P 500 index declines significantly, then the entire stock market may have a lot of downside potential. "

Wall Street analysts predict that the profit growth of companies in the S&P 500 index components will experience the largest contraction in the second quarter, with profits expected to decline by 9% compared to the same period last year. As of the time of writing, only slightly over 5% of the companies in this index have released their financial reports, but profits have already contracted by 9.3% so far.

However, according to Dan Eye, Chief Investment Officer at Fort Pitt Capital Group, the main driving force of the stock market in the coming months may begin to surpass the impact of the Federal Reserve's interest rate policies. This is because other positive signals indicate that profits will generally rebound in the second half of this year, especially as producer price inflation continues to improve. This is a decisive moment that is expected to boost profit margins and contribute to a better-than-expected profit outlook for the second quarter.

Eye added, "The period of most severe profit losses may already be behind us, unless a deep recession occurs, but we haven't seen this scenario since inflation has significantly eased. It is clear that the stock market has sensed signs of promising earnings prospects for some time now, and this has been clearly reflected in this year's market rebound."