Taking a page from the movie persona Jerry Maguire, Wall Street has this message for Business America: “Show me the profits!”
It isn’t a petition, but it is growing louder after the Standard & Poor’s 500 stock index suffered its fourth straight quarter of gain increase in the next quarter of 2016. (Since the end of the second quarter of 2015, when the profits downturn started, the S&P 500’s returns have slowed, with gains ofÂ less than 6%.)
A drop in energy industry earnings in recent times, due to adverse aftermath of last year’s crash in oil prices and an ongoing supply glut,Â isÂ theÂ reason S&P 500Â profit growth has stalled. Energy earnings contracted nearly 85 percent following a 106% plunge in the first quarter of 2016 and a dive in the final quarter of 2015, in the second-quarter, based on Thomson Reuters,
Together with the S&P 500 hovering under a half of a percentage pointÂ below itsÂ all-timeÂ Â largeÂ Â and trading inÂ Â 17.2 times its estimated earnings for the coming four quarters — wellÂ Â above the average long-term price-to-earnings ratio of 14.7, the profit rally must materialize soon for investors to be comfortable putting fresh money to work on the marketplace atÂ Â Â current lofty levels, Wall Street specialists say.
A profit downturn and stock market that is record-setting is an odd mix that can’t last forever, particularly with a Federal Reserve interest rate hike. In the second-quarter, 18 firms from the S&P 500 posted reductions, including energy and alloy exploration company Freeport-McMoRan, toymaker Mattel, oil services company Halliburton, aerospace giant Boeing and exploration company Conoco-Phillips.
And a ton of companies posted poorerÂ earnings per share than they did a year ago, including high-profile names like sports apparel maker.
“A gain recovery is essential for the rally to continue given stretched valuations,” states Nick Sargen, senior investment advisor at Fort Washington Investment Advisors.
Profits shouldÂ Â findÂ Â a boost from the second half of 2016Â from stabilizing oil prices and an uptick in U.S. economicÂ Â growth back to a speed of 2.5% or more. Energy industry profits aren’t expected to turn around before the fourth quarter, when they’re expected to grow.
Wall Street is hoping when their third-quarter results are reported by companies, the profit upturn comes. Currently, analysts are predicting S&P earnings to shrink 0.6% in the July-thru-SeptemberÂ quarter. However, as 1994, the S&P 500’s typical upside surprise each quarterly earnings season has been three percentage points, ” says Greg Harrison, earnings analyst at Thomson Reuters, that will propel the extensive stock index to positive profit growth this quarter for the first time since the second quarter of 2015.
Calling an end will offer a psychological boost to investors. “It will definitely make the opticsÂ better,” says Kate Warne, market strategist at Edward Jones.
But Doug Ramsey, chief investment officer in Leuthhold Group, doesn’t anticipate a powerful pick-up in earnings until the final quarter of this year, and he then anticipates muted profit increase as earnings are already at high levels and wage growth is picking up, 2 variables which will cut into bottom line profit growth.
However a fifth straight quarter of growth that is negative is Likely
“The market generally appears ahead three to six months,” Ramsey says, “So I really don’t thinkÂ Â Â another negative comp for the third quarter will probably be overly troublesome.”