Can Earnings Be The Catalyst To Take Markets Higher? Not This Quarter, At Least

Join me on my search for the elusive catalyst that could take U.S. stocks higher from what is already an all-time high.

Quiet, though, catalysts can be very shy.

Peaking through the bushes surrounding the water hole, I can see signs of company earnings. The big banks, Goldman Sachs (GS), JPMorgan Chase (JPM), and Wells Fargo (WFC) will lead off with their reports for the second quarter of 2019 on July 16. (Bank of America (BAC) follows on July 17.)

The season is expected to be disappointing. On June 28 FaceSet forecast that earnings for the Standard & Poor’s 500 stocks will fall 2.6% in the quarter.  That was a big drop from the 0.5% decline forecast back on March 31.

Yardeni Research is somewhat more optimistic but the forecast there is still for a drop of 1.4% in second quarter earnings.

From there the year gets some what better with third quarter earnings forecast by Yardeni to grow by 0.8% year over year.

And then we get a reasonable pop of 7.7% growth forecast for the fourth quarter. Of, course, that’s only impressive for those with very short memories who can’t recall the regular double digit earnings growth of 2017 and 2018.

The biggest problem, though, isn’t a lack of excitement in earnings even in the fourth quarter.

It’s that even this forecast growth leaves the market overextended.  The forward price to earnings ratio for 2019 is 16.6. That’s above the five-year average of 16.5 and the 10-year average of 14.8.

So if you’re expecting the market to move up significantly from here on earnings, you’re hoping for earnings growth to come in well above current forecasts (despite a slowing global economy as a result of the U.S.-China trade war) or for a market that looks fully valued to get even more fully valued (on something external to earnings such as Federal Reserve interest rate cuts.)