(Bloomberg) -- Earnings season is winding down and most of the big fears have been put to rest. One nagging concern remains, however: companies have been reluctant to raise forecasts.
While S&P 500 constituents are beating estimates at a near-record pace, their executives haven’t turned more upbeat on the outlook. Over the last three months, for every firm that lifted guidance above expectations, two cut it, the weakest showing in more than three years, according to data from Bank of America. During conference calls, the number of times the word “optimism” was mentioned fell to a record low.
That’s a bad omen, with the S&P 500 up 17 percent this year, according to Citigroup Inc. strategists led by Tobias Levkovich. While the direction of guidance doesn’t always dictate stock prices, the gap between them is a sign that share prices may have outpaced fundamentals, they wrote in a note earlier this week.
The risk is if earnings sentiment “winds up being a bit of a headwind given where valuations are and given how strong we had a start to equity markets this year,” Marvin Loh, global macro strategist at State Street, said in an interview.
Overall, close to 77 percent of S&P 500 companies that reported have beat on earnings, data compiled by Bloomberg showed. Margin improvements, thanks to expense cuts, have been a major driver of those stronger-than-expected results, according to Bloomberg Intelligence.
As companies continued to deliver positive surprises, the overall decline in first-quarter earnings -- pegged at 3.6 percent in March -- has narrowed to 1.7 percent. Strategists such as Jonathan Golub at Credit Suisse have said growth may end up in positive territory, avoiding an earnings recession that many had fretted at the start of the year.
Forecasts for the coming quarters, however, have turned worse. The expected rate of growth for the second quarter has gone negative, albeit only slightly. Forecasts for the second half have also been revised lower. All may have something to do with the management’s cautious stance.
There’s no shortage of reasons for the dour outlooks. For one, a lower bar is surely easier to cross than a higher one -- executives may just be setting themselves up to beat. Besides lingering uncertainty like U.S.-China trade talks and a strong dollar, one big threat is the slow creep of higher wages and expenses eating into the bottom line.
“If we are correct that unemployment will stay very low, jobs will grow, and therefore wage pressures may increase, that may crimp companies’ abilities to continue to keep a tight rein on expenses, which could mean that estimates for this year continue to drift down,” said Ellen Hazen, senior vice president and portfolio manager for F.L. Putnam.
Average hourly earnings growth came in below projections in the latest jobs report, which showed hiring picked up in April and unemployment fell to a fresh 49-year low.
Earnings guidance historically been strong in April, but this year’s proving to be an anomaly, according to Bank of America. Only one sector is posting net positive guidance: tech.
A few huge misses have dampened the picture. Shares of Intel Corp., for instance, plummeted as much as 10 percent after the company cut its full-year revenue outlook, reviving concerns about demand in chips for the second half of the year. And 3M Co. suffered its worst per-share loss since 1987 on weaker-than-expected quarterly results and a forecast cut that got investors agonizing over the state of U.S. manufacturing.
These companies are seen as bellwethers for the larger economy and aren’t helping to reassure investors already frazzled by monetary policy and the risk of a global slowdown according to Tony Roth, chief investment officer at Wilmington Trust.
“We’re by no means out of the woods,” he said in an interview.
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