Market Meltdown? A Closer Look at September’s Stock Market

Wall Street Witnesses Earnings Forecast Downturn as S&P 500 Declines by 4% in September

As apprehension grows among stock market investors due to the surge in Treasury yields and its impact on equities, the downward revisions in S&P 500 earnings forecasts are further fueling concerns.

Nicholas Colas, co-founder of DataTrek Research, observed that after several weeks of Wall Street analysts either increasing or maintaining their 2023 and 2024 S&P 500 earnings estimates, there was a reversal in this trend last week. This shift may have played a less recognized role in the recent market selloff.

In the past week, Wall Street reduced its third-quarter earnings estimate for the S&P 500 to $55.74 per share, representing a 0.6% decrease from the prior week. This effectively erased all the positive revisions made over the past seven weeks. For the fourth quarter, analysts lowered their forecast by 0.4% to $57.85 per share, essentially returning Wall Street’s estimate to where it stood at the beginning of June, as noted by Colas.

The changes in earnings forecasts signify a shift from the earlier optimism stemming from the upward trajectory in estimates, according to DataTrek. Colas pointed out that many trading algorithms give significant weight to revisions in earnings forecasts.

“While minor adjustments to earnings estimates typically go unnoticed, trends in this data can sometimes carry substantial implications,” he explained. “We anticipate further downward revisions in the upcoming week as analysts finalize their Q3 estimates.”

On Monday, the S&P 500 managed to eke out a modest gain but still recorded a 3.8% loss for September, marking the third consecutive weekly decline. Most sectors within the S&P 500 incurred losses this month, with only the energy and utilities sectors showing positive performance. Utilities saw a 1% gain, while energy stocks rose by 2.5%, partly due to increased oil prices in September.

The recent decline in the S&P 500 is attributed, in part, to the surge in bond yields, which have exerted pressure on equity valuations following the Federal Reserve’s late-September policy meeting. The yield on the 10-year Treasury note reached its highest level since 2007 after the Fed indicated its intention to raise interest rates and maintain them at elevated levels for longer than initially anticipated.

Higher bond yields result in increased borrowing costs, which can weigh on companies and their earnings.

With regard to corporate earnings expectations for the upcoming year, DataTrek highlighted a trend of downward revisions. Wall Street analysts reduced their 2024 earnings estimate for the S&P 500 by 0.3% last week, bringing it to $247.90 per share, marking the first reduction in nine weeks.

For the first half of the next year, analysts revised their earnings estimate for the S&P 500 to $57.93 per share for the first quarter and $60.90 per share for the second quarter, according to DataTrek.

Despite the climb in Treasury bond yields, U.S. stocks managed to close higher on Monday, with the Dow Jones Industrial Average edging up 0.1%, the S&P 500 rising by 0.4%, and the Nasdaq Composite advancing by 0.5%, according to FactSet data.