Are Wall Street’s earnings estimates too optimistic? ‘There is no more fear, only complacency,’ JPMorgan strategist says

The Wall Street analysts who follow companies in the S&P 500 index
tend to be an upbeat bunch, but as second-quarter earnings reporting season winds down, are they too upbeat on the months ahead? A JPMorgan strategist last week said yes.

“Earnings estimates appear too optimistic,” JPMorgan chief global market strategist Marko Kolanovic and others said in a note Monday.

JPMorgan cited second-quarter profit growth that largely failed to impress, along with “less upbeat” financial outlooks. They also pointed to greater pressure on profit margins as customers take fewer risks on spending.

They also said next year’s profit growth wasn’t looking very good either, as the Federal Reserve pushes up borrowing costs, consumer savings dwindle and economies overseas stumble.

“The consensus 2024 EPS growth rate of 12% appears too optimistic given an aging business cycle with very restrictive monetary policy, still rising cost of capital, lapping of very easy fiscal policy, eroding consumer savings and household liquidity, low unemployment rate, and increasing risk of a recession for some of the largest economies abroad (e.g., China, Germany),” Kolanovic said.

He made that assessment as some economists shrug off concerns of a downturn or otherwise soften or fine-tune the language they use to describe the economy’s path ahead, be it a hard landing, a soft landing or something with lighter bumps in between. However, consumers continue to struggle under higher prices, which nonetheless led to big corporate profit gains. And those still anticipating one of the most-anticipated downturns in the nation’s history expect more bad news next year.

The Federal Reserve recently said it no longer expected a recession, but instead was preparing for a “noticeable slowdown.” On Friday, Federal Reserve chair Jerome Powell, speaking from a retreat in Jackson Hole, Wyo., said the central bank was unsure whether it needed to raise interest rates more in an effort to fight inflation. The Fed has raised interest rates to discourage borrowing money in hopes inflation will fall as consumers pull back on their spending.

Powell said inflation remained “too high,” and that the Fed “will keep at it until the job is done.”

Kolanovic said that while the U.S. economy has fared better than other nations, he said that it wasn’t immune to the potential damage from higher interest rates, but any corresponding anxiety, he said, was no longer the prevailing mindset.

“Compared to the start of the year, investor expectations, market positioning and the equity valuations have moved up, with soft/no landing the new base case,” he said. “There is no more fear, only complacency.”

This week in earnings

Dell Technologies Inc.
and HP Inc.
report during the week, as prices for electronics have run at a discount for much of the past year. The same, however, can’t be said for food, which people have to buy. Look to results from Hormel Foods Corp.
and Campbell Soup Co.
for potential context on how much food prices might come down. Online pet-supplies retailer Chewy Inc.

reports during the week, after Petco Health & Wellness Co.
last week noted a “bifurcation” among its customers, who were alternatively flocking toward cheaper and more expensive pet food. Chip maker Broadcom Inc.
also reports.

The calls to put on your calendar

Even more retailers, maybe even more “shrink” talk: Lots of retailers over the past two weeks have said increased theft at stores has weighed on profits, although that impact hasn’t been universal. Will the retailers report this week follow suit — talking up theft, either genuinely or as an excuse — as weaker demand and efforts to clear out irrelevant products and bring in new ones complicates life for many store chains? Best Buy Co. Inc.,
Big Lots Inc.
Five Below Inc.
Dollar General Corp.
and Ollie’s Bargain Outlet Inc.
and others report this week.

The number to watch

Salesforce : Cloud-based workplace-management software providers Salesforce Inc.
and Okta Inc.
report during the week. They’ll report as AI remains a near-guaranteed accelerant to the tech universe, but as some analysts start to pick apart the potential costs. Morgan Stanley recently downgraded Salesforce on doubts about the near-term potential.

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