As earnings support U.S. stock rebound, worries over future profits grow

Stronger-than-expected corporate earnings have helped fuel the rebound for U.S. stocks but some investors are pointing to potential risks ahead for profits that could sap the market’s momentum.

“There is some downside to earnings going forward and it’s revolving around inflation and the ability of companies to pass on those rising costs,” said Paul Nolte, portfolio manager at Kingsview Investment Management.Analysts’ estimates for full-year profit growth have edged lower since the start of July, but still call for solid growth -- 8% in both 2022 and 2023, according to Refinitiv.

While goods make up less than a third of gross domestic product, earnings tied to goods are expected to account for 62% of S&P 500 earnings this year, BlackRock said. “The risk of disappointing earnings is one reason we’re tactically underweight stocks,” BlackRock said. Morgan Stanley’s strategists, meanwhile, are focused on the prospect of weakening profit margins. Overall analyst estimates call for companies’ operating margins at all-time highs next year, they noted.

At the same time, rising valuations could set a higher bar for earnings to come in strong enough to justify the elevated prices. The forward price-to-earnings estimate for the S&P 500 has risen to about 18 times after falling below 16 times in June, according to Refinitiv Datastream. The ratio is still well below the nearly 22 times level reached at the start of the year.

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