Earnings Guidance Is Down, so Why Is the Market Up?

It should be an unnerving time for equities investors.

As of July 3, 88 out of 114 S&P 500 companies that released earnings and issued earning-per-share guidance for the third quarter gave negative guidance, according to FactSet. In other words, looking at their third quarters, 77% expected lower EPS than they did at the same time in 2018. The percentage is the second highest FactSet has seen in a single quarter since it began tracking that data in 2006, according to a report from the company.

For markets that depend on the anticipation of future earnings growth, that would seem to be terrible news. But investors have shrugged it off. June was a near record month and both the Dow and S&P 500 have hit record highs. Why?

“In one word, it’s the Fed,” said David Spika, president of GuideStone Capital Management. “Investors have become way too complacent and way too dependent on monetary policy. There’s a belief that the Fed can save us from everything, and I think investors have their heads in the sand.”

The Fed funds futures market has priced in a 100% chance that the Fed will cut rates—not just in July, but at every meeting through the next year, essentially assuming that the rate will be 2.09% at the end of this month and 1.52% after the July 2020 meeting.

Although earnings are off, they remain up. “The thought of a recession happening in 2019 vanished as companies reported positive earnings growth and reaffirming outlooks into the next twelve months,” said Brian Antenucci, a principal with Bartlett Wealth Management.

Also, many are assuming better news down the line if U.S.-China trade war tensions ease. “People are expecting that guidance to move higher toward the end of the year,” said Victoria Fernandez, chief market strategist at Crossmark Global Investments.

The producer price index was up about as much as the consumer price index, suggesting that production and cost, not long-term labor, are the issues affecting margins and, therefore, earnings.

“If people expect a big bump in the fourth quarter, perhaps that’s why people are overlooking some of the negativity we see in the numbers because that’s in the past,” Fernandez said.

If not, investors could be in for an ugly wakeup call this fall.

The Stock Market Is Completely Ignoring Negative Earnings Guidance. Why?

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