A growing minority of Wall Street strategists are warning clients that next year won’t be much better than this year.
“2017 expectations … overstated,” RBC Capital Markets’ Jonathan Golub writes.
In a note to clients on Monday, the veteran Wall Street stock market strategist warns that his peers are far too optimistic about the prospect for S&P 500 (^GSPC) earnings growth. In particular, he warns about forecasts for the energy and banking sectors, which have been crushed by low oil prices and depressed interest rates, respectively.
“Consensus estimates are for 15% EPS growth in 2017,” Golub observes. “This number would be 11% excluding Energy and Banks.”
Golub further acknowledges the long history of earnings estimates being slashed as years progress, and he even modeled his own trajectory for how estimates for 2017 earnings will be cut.
“Given the normal path of revisions, estimates are likely to decline 5% through the end of 2017,” Golub says. “This should bring next year’s growth to roughly 6%, a much more reasonable assumption.”
Golub sounded his warning as early as July, and he joins other forecasters — including JPMorgan, Citi, Morgan Stanley, UBS, and Bank of America Merrill Lynch — who believe the double-digit earnings growth expected by the consensus is not going to happen.
The urgency of this discussion is heightened by the fact that market valuations are stretched. Currently, the forward 12-month P/E ratio, which is based on forecasts for earnings growth in the next 12 months, is high at around 16.7. This is far above the 5-year average over 14.9 and the 10-year average of 14.3. There are a couple of ways for valuations to revert back to more modest levels including falling stock prices or surging earnings.
Without the support of earnings growth, prices become that much more vulnerable to volatility.
Sam Ro is managing editor at Yahoo Finance.