Despite Waning Profits, S&P 500 Earnings Expectations are Still Sky High

Considering that S&P 500 firms are set to report a sixth consecutive quarterly earnings decline in Q3, Wall Street’s incredibly optimistic 2017 earnings expectations are almost certainly way too high.

From Bloomberg:

Hitting forecasts for next year would require S&P 500 Index companies to increase profits by 13 percent, something that hasn’t happened since 2011. Failing to do so would risk inflating equity valuations that at 20 times annual income are already the highest since the financial crisis.

Many analysts are skeptical that companies will hit those numbers, especially given how weak certain sectors are:

“You’d have to have a lot of things working in unison to achieve that number, a lot of things would have to go correctly,” Peter Andersen, chief investment officer at Fiduciary Trust Co. in Boston, said by phone. His firm manages more than $11 billion. “You’ll have areas where growth will be quite strong, like certain technology areas, but other industries like financials will never have that kind of growth through 2017.”

As a whole, the S&P 500 is nearing the largest earnings recession on record. Q2 marked the fifth straight quarter of earnings declines, and Q3 is expected to be the sixth. Up until a few months ago, analysts had expected things to turn around in Q2, but the recovery was pushed off to Q3, and now, Q4.

The ramifications of expectations being so out of line with reality are unknown. So far, the markets have absorbed the earnings recession with a shrug. This trend could simply continue through next year, with massive growth in certain sectors buoying big losses in others.

Or, things could finally turn south for the markets, with valuations finally coming back down in-line with reality. Wouldn’t that be something?

SPY-2016-09-19

The SPDR S&P 500 ETF Trust (NYSE:SPY) rose $0.92 (+0.43%) to $214.29 per share in premarket trading Monday. Year-to-date, the largest ETF tracking the benchmark S&P 500 index has risen 4.66%.

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