Jul 6, 2020 - Economy

Analysts expect soaring stock market despite slashed earnings forecasts

Data: FactSet; Chart: Axios Visuals

Despite cutting expectations for companies' earnings by the most in history and revenue by the most since 2009, Wall Street analysts are getting increasingly bullish on the overall direction of the U.S. stock market.

What's happening: Equity analysts are expecting earnings in the second quarter to fall by 43.8% — the most since 2008's fourth quarter 69.1% decline.

  • They also project earnings this year to decline by 28.6%, the largest decrease in the annual EPS estimates for the index over the first six months of the year since FactSet began tracking the data in 1996.
  • Revenue estimates, too, have been cut back significantly, with year-over-year revenue expected to fall 11.2% in Q2, which would mark the steepest decline since Q2 2009 (11.5%).

Of note: Through Thursday, 185 S&P 500 companies had withdrawn or confirmed a previous withdrawal of annual EPS guidance for fiscal year 2020 or FY 2021 and just 49 have issued EPS guidance for Q2 2020.

  • The number of companies issuing EPS guidance to date for Q2 2020 is less than half the 5-year average for a quarter of 106.

On the other hand: Price targets for the S&P have steadily risen in recent weeks with data now showing the average bottom-up, year-end target price is 3328.37 — 6% above the index's current level, FactSet senior earnings analyst John Butters points out in note to clients.

  • Of the 10,356 analyst ratings of individual S&P companies, 52.7% are buy ratings, 41.1% are hold ratings, and 6.2% are sell ratings.

Between the lines: The expectations for higher stock prices also defy already frothy valuations.

  • The S&P 500's forward 12-month price-to-earnings ratio is 21.8, well above the index's five-year average of 16.9 and 10-year average of 15.2.
  • At the end of the first quarter, the S&P's forward 12-month P/E ratio was 15.6.

By the numbers: "Since the end of the first quarter (March 31), the price of the index has increased by 20.6%, while the forward 12- month EPS estimate has decreased by 12.7%," Butters notes.

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