Wall Street’s Faulty Crystal Ball
Another quarter, another wheelbarrow of earnings expectations for our businesses to meet. Wall Street loves doing the predicting, but according to data just in, missed estimates could leave the economy hanging by a thread.
Buying a stock means buying the future, and analysts every quarter aim to prophesize that future with a forward-looking projection. Their crystal balls carry weight. Beat expectations and the market rewards your stock. Miss, and take your punishment. Investors stalk the earnings results as they’re released to judge whether or not businesses are making the cut.
When the performance of stocks relative to expectations is taken as a whole, investors get another gauge on the state of the economy. FactSet, a financial data supplier, said yesterday that stocks may fall short in the second and third quarters, prompting fears of an “earnings recession.” Yes, the dreaded R-word!
We’re certainly not in an actual recession. The S&P 500 reached an all-time high last Friday as expectations rose not on company earnings, but on the lowering of interest rates. The flip side of the coin? The US and China are still fighting tooth and nail over trade, escalating tensions with no tonic. Overseas stocks are feeling pressure to real earnings, which has led FactSet to ironically predict that numbers will disappoint predictions.
Whatever happens in the coming weeks, keep an open mind. If analysts elect to mark down earnings forecasts, investors may think twice about the price they’re paying for shares. A mass sell-off could ensue. Equally plausible, is that missed expectations only shift expectations onto the Federal Reserve to lower interest rates and save the day. Stock market highs are at stake here. On your guard!