OK, everyone knows that second quarter earnings, the earnings that companies are reporting right now, are going to be dismal. Overall earnings for the S&P 500 stocks are expected to fall 4.5% year over year according to Thomson Reuters. Earnings for technology stocks are expected to be even worse with a year over year decline of 7.4% for stocks in that sector.
But that dismal forecast is by now old news. And a stock market that heads for new highs every day is clearly looking past second quarter earnings and looking forward to a recovery in the third quarter.
Which is why guidance for the third and fourth quarters, usually released in the conference call that goes with the report of current quarter earnings is so important. Because theres no guarantee that the third quarter will see positive earnings growth.
At the end of June, just before the June 23 Brexit vote, Wall Street analysts were projecting earnings growth of 2.4% for the third quarter. Not great, perhaps, but enough so investors could feel that earnings, after five straight quarters of declines, had turned the qwuarter.
Since then, however, the forecast on Wall Street for third quarter earnings has fallen to growth of just 1.5%. Granted that’s still positive but the trend is pointing in the wrong direction for the comfort of investors in a stock market that is trading at an all time high.
These are all just projections, of course, but projections are also expectations that drive stock prices higher or lower.