Stock market is not the economy and a boom in services doesn’t power S&P 500 earnings | The Financial Express

Stock market is not the economy and a boom in services doesn’t power S&P 500 earnings

Jerome Powell in his recent address at Jackson Hole Economic Policy Symposium 2022 warned of the pain ahead for the economy as rate hikes will continue to tame inflation.

Stock market is not the economy and a boom in services doesn’t power S&P 500 earnings
Corporate earnings may weaken more as consumer spending shifts and profit margins contract.

For a stock to become a multi-bagger, what finally matters is the earnings growth rate of the company. There could be several factors impacting the stock price in short term but over the long term, it is the earning that pushes the share price higher. In the current economic environment, overall corporate earnings are seeing a decline. The impact could be seen in the falling performance of the key US indices.

BlackRock Investment Institute in its weekly commentary states that they see company earnings deteriorating amid a rotation in consumer spending and a sputtering restart. This is partly why they remain cautious about stocks. Stocks are rallying as markets believe inflation is waning and the Fed will slow hikes soon. BlackRock doesn’t think the rally is sustainable as they see the Fed hiking rates to levels that will stall the economic restart.

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Jerome Powell in his recent address at Jackson Hole Economic Policy Symposium 2022 also warned of the pain ahead for the economy as rate hikes will continue to tame inflation.

One of the biggest reasons for the market crash since January 2022 is inflation leading to rising yields. But, a big reversal happened from June lows. The equity rally that saw SP500 rise 17% from June lows may not be sustainable. According to BlackRock’s commentary, “Stocks jumped on hopes of the Fed pausing hikes soon as inflation edges lower. We think that’s premature and see inflation settling above pre-Covid levels”

BlackRock’s commentary goes on to state that corporate earnings may weaken more as consumer spending shifts and profit margins contract. This is not a typical business cycle, so we expect differentiated regional and sectoral effects. The risk of disappointing earnings is one reason we’re tactically underweight stocks.

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The pandemic and unique restart of economic activity brought about a massive re-allocation of resources. During the pandemic, consumer spending shifted to goods and away from services. That propped up goods producers’ earnings.

That’s changing, in our view. Goods demand is weakening. Overstocked inventories, from retailers to semiconductor firms, are evidence of that. Meanwhile, spending is returning to services. This shift could hit stocks. Why?

Earnings tied to goods are expected to make up 62% of S&P 500 profits this year, versus 38% tied to services. In addition, the stock market isn’t the economy, states the BlackRock’s commentary. Goods accounted for less than a third of the U.S. economy in the first half of this year. This means a boom in services doesn’t power S&P 500 earnings as much as it does the economy.

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