- An upside surprise in the stock market is brewing as Wall Street analysts cut their third-quarter S&P 500 earnings estimates.
- Analysts have cut their aggregate Q3 S&P 500 earnings estimates to $48.93 per share from $49.30 per share despite seasonal data suggesting growth.
- "We can't think of a time when analysts have so seriously underestimated US corporate earnings power," DataTrek said.
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An upside surprise in the stock market could take hold as Wall Street analysts cut their earnings estimates despite strong seasonal trends, DataTrek said in a Monday note.
Over the past month, third-quarter earnings estimates for the S&P 500 have fallen to $48.93 per share from $49.30 per share, according to data from FactSet. That's 7% below the S&P 500's actual Q2 earnings results of $52.80 per share.
The drop in S&P 500 earnings estimates is surprising due to seasonal trends and recent corporate behavior, DataTrek highlighted. In economic expansions since the 1990s, Q3 earnings results are either the same or slightly higher than Q2 results.
Meanwhile, US businesses are signaling continued strength in their earnings results based on aggressive hiring trends amid a tight labor market, DataTrek said.
"Would companies be hiring and advertising open positions as aggressively as the US labor market data shows if they were expecting a 7% sequential drop in profitability? It seems unlikely," DataTrek co-founder Nicholas Colas said.
And the US corporate bond market isn't signaling any stresses that would suggest a deterioration in earnings power, with low yields suggesting that cash flows should remain high and stable for years to come.
"In +30 years of covering US equity markets, we can't think of a time when analysts have so seriously underestimated US corporate earnings power in any given year," Colas said.
But according to DataTrek, investors think Wall Street analysts have it wrong based on the quick recovery in recent stock market sell-offs, most recently being the Evergrande sell-off and ensuing recovery last week.
"The market thinks, rightly in our opinion, that US corporate earnings have one more leg higher versus Wall Street expectations," Colas concluded.