Analysts can not stop cutting profit forecasts

Largely lost in the debate over how much credit President Donald Trump should or should not get for the performance of US stocks this year is that perhaps the biggest reason for the rally is strong earnings. With more than 90 percent of the S&P 500 members having reported second-quarter results, earnings growth is tracking at a 12.2 percent pace year-over-year, much better than the 8.4 percent expected, according to Bloomberg Intelligence.
All sectors of the benchmark are on pace to beat projections, except energy, where less than 40 percent of companies topped earnings forecasts. Technology and health care continue to lead upside surprises, with more than 85 percent of tech companies and 75 percent of health companies posting better-than-expected earnings per share. Markets are forward looking, so it stands to reason that what happens next in earnings should have a big influence on the direction of stocks.
That’s where things start to look less rosy. Despite the positive earnings surprises in second-quarter results, S&P 500 profit estimates for the next four quarters continue to edge lower. Earnings per share forecasts for the index through mid-2018 have been reduced by 0.7 percent since the end of June, with the fourth-quarter bearing the brunt of downward revisions, according to Bloomberg Intelligence.
The US-German yield divide begins to reverse: here’s something the Federal Reserve probably doesn’t want to see. The spread between US and German five-year government note yields, which are narrowing amid continued tepid inflation, according to Bloomberg News’s Liz Capo McCormick.
US consumer prices rose just 1.7 percent in July from a year earlier, a fifth month of below-forecast data and down from as high as 2.7 percent as recently as February. At the same time that inflation in the US underperforms Fed policy maker expectations, European growth and inflation are firming up. The US-German spread, which reached 2.61 percentage points in December, will likely “converge” toward its half-decade average and reach about 1.5 percentage points before the end of the first quarter of 2018, according to Aaron Kohli of BMO Capital Markets. You can be sure that currency traders are watching this closely, as the shrinking spread has been partly blamed for the dollar’s weakness this year. So, any further convergence is likely to mean more pain for dollar bulls.
Brexit not done biting the pound: what once seemed a highly unlikely call on euro-sterling is gaining momentum, with two of the world’s leading banks predicting that Europe’s shared currency will attain and even go beyond parity with the pound for the first time, according to Bloomberg News’s Anooja Debnath. Morgan Stanley sees the pair at 1.02 by the end of March, which represents a 12 percent gain for the euro from current levels, while HSBC is sticking to its forecast that the euro will trade one-for-one against the pound by year-end.
The euro has surged more than 6 percent against the pound this year amid speculation that the European Central Bank will announce a tapering of bond purchases by autumn. By contrast, the pound is being held down by uncertainty surrounding Brexit negotiations.

— Bloomberg