JPMorgan says the stock market's biggest driver will be weaker than expected going forward
Andrew Kelly/Reuters
- The main driver behind stock prices is set to weaken amid a period of high interest rates, according to JPMorgan.
- Corporate profits will head lower due to high rates combined with deteriorating consumer finances, the bank said.
- "Consensus expectations of 12% forward EPS growth should be revised lower," JPMorgan said.
The stock market's biggest driver is due for a slowdown that few on Wall Street expect, according to a Monday note from JPMorgan.
Corporate profits will head lower amid high interest rates combined with deteriorating consumer finances, the bank said.
Consensus estimates suggest the S&P 500 will grow its earnings per share by 12% in 2024, but that view is "divorced" from the growing risks of diminishing consumer savings, restrictive monetary policy, and elevated geopolitical risk.
"Consensus expectations of 12% forward EPS growth should be revised lower," JPMorgan said. And lower growth estimates ultimately mean lower stock prices.
A period of "higher for longer" interest rates is set to drive interest expenses up for corporations, with JPMorgan estimating that the impact of refinancing $800 billion worth of corporate debt that is set to mature in 2025 at current rates would reduce S&P 500 earnings per share by about $3.
But what could be even more detrimental to company earnings results is a slowdown in revenues, in part driven by a stretched-to-the-limits consumer. JPMorgan estimated that just a 1% decline in revenue would translate to a -$2.25 earnings per share headwind for the S&P 500.
"Earnings growth has come to almost [a] standstill in the past year and it should turn negative if the business cycle inflects from slowdown to outright contraction," JPMorgan warned, adding that since World War II, S&P 500 companies saw an average earnings decline of about 20% during recessions.
Any decline in corporate earnings would likely be a shock to stock prices given that Wall Street consensus is calling for double-digit profit growth over the next year. The return-to-growth forecasts come after a short-lived earnings recession that likely ended in the third quarter as fresh results continue rolling out.
Another reason why corporate earnings could be weaker amid the current period of 5%+ interest rates is because corporate stock buybacks are slowing, as it becomes prohibitively expensive for companies to take on debt to buy back their stock. This practice was used extensively over the past decade of near-zero interest rates.
Bank of America said in a Monday note that stock buybacks have "notably slowed" in recent quarters and are down 30% year over year in the third quarter. The bank said muted debt issuance should result in continued weakness in stock buyback programs.
Buybacks ultimately help boost earnings per share by reducing the number of shares outstanding. It's been a widely used strategy to help lift EPS when revenues stays flat or even falls.
With higher interest rates set to drive lower profits on a number of different fronts, JPMorgan is staying cautious.
"After more than a decade of easy money, we believe there are many known risks, but even greater unknowns that have yet to surface," it said.
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