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MarketScape · 09.19.23

Equities May Stumble over Rising U.S. Earnings Expectations

Increasing market expectations for U.S. earnings growth over the next two years have backed large-cap equities. Chief Investment Strategist for North America Chris Shipley examines the assumptions underlying earnings estimates and why the market may be in for disappointment.
Volatility & Risk
Market Views
Equity Insights
Chief Investment Strategist – North America
Key Points
What it is
We examine the risks from elevated equity valuations and potentially overly optimistic expectations of U.S. earnings growth.
Why it matters
We believe earnings in 2024 and 2025 will fall below estimates, possibly causing the stock market to stumble.
Where it's going
We are underweight equities globally, favoring high‑yield bonds and natural resource stocks.

U.S. large-cap growth stocks have outperformed value and small caps over the past month, supported by rising earnings estimates that now equate to 12% annual growth in both 2024 and 2025 for the S&P 500 index. This trend, combined with elevated valuations, implies the U.S. market has become increasingly optimistic about the consumer and the economy.


However, we expect earnings growth to disappoint, with multiple economic headwinds ahead, both in the U.S. and globally. Let's take a closer look.


Solid U.S. retail sales and broader spending trends has backed the story of consumer durability to date. But our research shows the depleting pandemic excess savings and a new peak in consumer debt have supported that growth. We expect that consumer spending will need to align with slowing wage growth, reducing the capacity of the consumer to spend.


On a more global level, consumers in China are retrenching in the wake of a weakening property sector. Economic risks are growing in China. And while we do not expect financial system contagion from a deteriorating outlook, China could export economic weakness if current trends remain in place, threatening the global economic outlook.


In addition, we don't think the market fully appreciates the toll that sustained higher interest rates, supported by the Central Bank's rate hike campaigns, will take on the economy. While the European Central Bank and the Federal Reserve will likely ramp up rate hikes soon, we don't expect them to hurry into rate cuts as inflationary pressures remain above their comfort level. While expected, U.S. inflation ticked up this month, due in part to a rise in energy costs, as oil prices have recently hit year-to-date highs, complicating the outlook for central banks.


With these hurdles to economic growth, we maintain our global underweight to equities and our global policy model that guides across Northern Trust portfolios, based on our 12-month outlook. We favor bonds over developed market equities, as high-yield has better return prospects in the base case, as well as better downside protection should equity markets retreat. We also like natural resource stocks over emerging markets, given similar economic exposures but less political risk, and continue to modestly overweight cash for the attractive yield and dry powder for future opportunities.

Main Point

Earning Expectations Unlikely to Hold Up

High interest rates and our view that U.S. consumer spending will stall make earnings estimates for the next two years appear too high. As a result, we are underweight equities in the U.S. and globally, favoring high-yield bonds and natural resource stocks.


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Chris Shipley

Chief Investment Strategist – North America

Chris Shipley is chief investment strategist for North America, responsible for the strategic and tactical asset allocation policy for our institutional and wealth management clients. Chris chairs the Northern Trust Tactical Asset Allocation Committee and is a voting member of the Investment Policy Committee. In addition, he co-manages the Northern Global Tactical Asset Allocation Fund.

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