A Market Bottom Will Need More Cuts To Estimates

A Market Bottom Will Need More Cuts To Estimates

By Michael Msika and Sagarika Jaisinghani, Bloomberg markets live commentators and reporters

The rally in stocks since June’s low has been built on shaky foundations and, according to many market watchers, a key ingredient for a solid base is still missing — more cuts to earnings estimates.

An analysis of the past four recessions by Bank of America showed that the S&P 500 Index bottomed only after earnings per share forecasts had fallen either to or below the level they were at when the market last peaked. Fast forward to now — while projections have fallen, they are still about 6% higher than at the time of January’s all-time record.

“We’re still in the very early innings of the downturn and estimate cuts,” Bank of America strategist Savita Subramanian said. “Was June the big low? Our bull market signposts say no.”

Their words will send a shiver through those that have chased equities higher over the past six weeks even as company executives sounded more cautious about economic growth. US stocks finished July with their biggest monthly gain since 2020 as weaker economic data spurred expectations that the Federal Reserve could slow the pace of rate hikes. A better-than-feared corporate earnings season has also stoked wagers that profit margins are proving resilient to scorching inflation and gloomier consumer sentiment.

That’s not to say corporate guidance is holding up strongly or that analysts are sticking to bullish forecasts for the rest of the year. A Citigroup Inc. index showed earnings downgrades are outnumbering upgrades at a level last seen at the height of the pandemic in 2020.

Yet, according to Morgan Stanley strategists, the magnitude of the cuts is still

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