Advisors and analysts are busy watching the Federal Reserve’s every word on future interest rates. But they should be keeping an eye on corporate earnings as well, argued Charles Schwab (SCHW) Chief Global Investment Strategist Jeff Kleintop.
“The gap between estimates for the year ahead and actual earnings is now the widest since 2009,” Kleintop warned in a report on Monday.
But unlike 2009, today’s earnings slump is not being accompanied by a global recession, which would be followed by a sharp rebound in the economy and earnings, he pointed out.
“For the past six months, global stocks have been supported by an improving earnings outlook, but with expectations stretched, stocks are vulnerable to a pullback if actual earnings fail to deliver on the promise of better growth,” the strategist explained.
For 18 months, many analysts trimmed earnings estimates for global companies by a total of 14%, he said, but then they spent the past six months raising them. “Are they now expecting too much?” Kleintop asked, noting that while earnings estimates are rising, actual earnings are falling.
There were good reasons in ‘09 for optimism driving a wide gap between actual earnings for the prior year and earnings estimates for the coming year, and earnings doubled over the next two years thanks to a rebound in the global economy, Klentop said.
In 2010 and 2011, global GDP growth ticked up 5.4% and 4.2%, respectively (a similar chain of events took place in 2002, according to Kleintop).