S&P 500’s rebound is at risk from a souring US earnings outlook

(Bloomberg) — The stock market just finished its best week in almost a year, but lurking beneath the euphoric surface are fears about Corporate America’s profit outlook.

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Among companies that have issued guidance this earnings season for next quarter and beyond, more have been providing estimates that trail analysts’ expectations. A gauge of forward guidance that compares corporate forecasts with the Wall Street consensus has been lower only once since 2019, data compiled by Bloomberg Intelligence show.

The equities optimists might look at that and conclude the C-Suite signals will end up being too conservative, setting the stage for eventual investor cheer. But the gloomier interpretation is that companies are quietly building caution as they grapple with a concerning global outlook and the demand headwinds from the Federal Reserve’s aggressive interest-rate hikes.

“If there’s a lot of optimism based on forward projections and suddenly that starts to turn, then it doesn’t bode well for stock prices,” said Adam Phillips, managing director of portfolio strategy at EP Wealth Advisors. “But we’re seeing more signs that cracks are beginning to form from tighter financial conditions and profit outlooks. Some analysts have been slower to come to terms with this.”

Only about a quarter of S&P 500 companies provide quarterly guidance, and just over half offer it on an annual basis, typically the technology and discretionary sectors. Earnings for most Big Tech companies have been in line or above expectations, though the outlook has dimmed along with broadly higher borrowing costs.

The S&P 500 gained 5.9% this week after weaker-than-forecast US jobs data on Friday bolstered bets the Fed is done tightening and caused Treasury yields to dive.

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The gauge of earnings guidance momentum — derived in part from the ratio of increased versus reduced guidance — is hovering at the lowest level since the first quarter, and…