[Reuters Analysis] Rosy US earnings vista doesn't match gloomy growth outlook: McGeever

ORLANDO, Florida, March 25 (Reuters) - U.S. economic growth is set to slow this year, perhaps significantly, but no one seems to have told Wall Street. While equity prices and valuations have tailed off recently, analysts are still expecting record-high profits.

In some ways, this is how it should work. Shifts in the economic, political, regulatory or financial environment that affect corporate profitability should be reflected in the stock market well before analysts adjust their longer-term outlooks.

And a re-rating of sorts has already played out. U.S. equity valuations have come off their historic peaks, as the S&P 500 has flirted with a 10% reversal from its record high and the Nasdaq has waded deeper into correction territory. Earnings growth is expected to slow modestly this year.

But profits, which are already at record-high levels, are still expected to keep rising fairly quickly despite the increasingly dour economic growth forecasts. The S&P 500 weighted average earnings per share estimate for 2025 is a record high $269.91, representing growth of around 10% from last year, according to LSEG I/B/E/S. The calendar year 2026 estimate assumes there will be an additional 14% rise.

This suggests the re-rating hasn't gone far enough.

The mismatch can be resolved in one of two ways: either growth holds up better than expected, justifying the bullish earnings outlook, or earnings per share forecasts are ratcheted sharply lower to reflect the bleaker economic environment.

Investors on Tuesday got further evidence of the darkening growth outlook as the U.S. Conference Board's consumer confidence index fell to a four-year low and expectations sank to a 12-year low. Yet there was no major selloff on Wall Street.

This follows a recent University of Michigan survey that showed the lowest consumer confidence in a two and a half years and the highest long-term inflation expectations in 33 years.

If the consumer, who accounts for 70% of U.S. GDP, is simply not feeling it, shouldn't earnings forecasts come down?

OUTLIER

Earnings per share estimates are nominal, so they'll rise over time, much like the market itself. Periods of flatlining earnings are rare and outright earnings recessions are even rarer, as they tend to occur in and around actual recessions.

The most obvious outlier was in 2022-23 when earnings estimates shrank more than 5%. Wall Street was in a bear market, but the economy avoided recession.

A near-term recession isn't currently the consensus view among economists, but the risk is rising as uncertainty fueled by U.S. President Donald Trump's tariff and immigration policies saps consumer and business confidence, putting spending plans on ice.

Fed officials last week lowered their economic projections, and if their median outlook for this year and next is borne out, it will mark the slowest back-to-back annual growth rates since 2011-12.

And deterioration in the 'soft' data is already starting to seep into the 'hard' data. Retail sales in January plunged at their fastest rate in more than two years and barely recovered in February. Again, this doesn't tally with the idea that earnings will continue to rise at double-digit levels.

The flip side, however, is the view that growth fears are overdone and that the economy will successfully navigate this current political turbulence. Based on this thinking, if you're an investor with a multi-year horizon, then it makes sense to sit tight, ignore the noise, and stay invested.

Analysts at Schroders point out that market performance and 12-month forward EPS estimates have been closely correlated over the past 20 years. Politically-driven market volatility tends not to persist over long periods, and the turbulence it creates can often be a buying opportunity for long-term investors.

But if Trump's tariff uncertainty forces consumers to retrench to any significant degree, a reassessment of corporate profitability will likely follow.

With this mismatch, one thing is for sure - in the coming months, something has got to give.

(The opinions expressed here are those of the author, a columnist for Reuters.)

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