The S&P 500 Could Drop 8%. Why the Stock Market Is on Shaky Ground.

This post was originally published on this site
NYSE

Earnings season is about to kick off. If analysts keep lowering profit estimates, the stock market could take a sizable hit.

Third-quarter profit estimates for the S&P 500, in aggregate, fell 0.8% between Sept. 3 and Oct. 8, according to DataTrek. Companies have dealt with supply and labor shortages, hampering their ability to meet sales expectations while raising costs and lowering profit margins. Recently, higher commodity prices have added to the dimming earnings picture. 

Estimates could keep falling. Earlier in the year, 75% of earnings revisions were upward. Now, it’s a more slender majority. Mike Wilson, chief U.S. equity strategist at Morgan Stanley, predicts there will be as many downward revisions as upward revisions at some point this earning season.

The stock market would also likely fall hard in that scenario. Wilson is projecting the S&P 500 would fall to 4000, based on the index’s recent correlation to the direction of analyst earnings revisions. That would represent an 8% drop from the index’s current level of 4350.

Such a market selloff would bring the S&P 500 into correction territory. The 4000 level would be 11.8% below the index’s all-time high of 4536 on Sept. 2 Strategists have recently called for a correction. This September, the S&P 500 dropped more than 5% from its all-time closing high to the lowest close of its recent pullback. That was its largest decline since it fell almost 7% in September 2020.

The S&P 500 has slipped 0.3% on Wednesday, while the Dow Jones Industrial Average has dropped 186.74 points, or 0.5%.

The drop would happen quickly. Analysts usually don’t take longer than a day to revise their forecasts after their companies report earnings—and the bulk of earnings season is only a few weeks long. 

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com