Down go Wall Street profit forecasts, and potentially the market more broadly.
The S&P 500
Subsequently, the S&P 500's price to earnings multiple -- or what investors are willing to pay to own a piece of a company's future profit potential -- has compressed to about 16 times from 18 times earlier in the year.
A key driver of the bull market of the past year has been Wall Street pushing up their profit forecasts on the biggest companies in Corporate America. But with trade war fears dominating, Wall Street may be making early moves to price in any impact to corporate bottom lines. Should the trend continue, equities could slip further.
BofA does its part to temper the gloom and doom around profits.
"A peak in the ERR is hardly a reason for concern, in our view," says BofA strategist Savita Subramanian. "We have found the best signal for subsequent returns is whether the ratio is above/below its historical average (currently 0.87), and with the ratio firmly above this level, it suggests strong near-term returns."
Adds Subramanian, "And while nearly all sector ERRs have rolled over (except for Utilities) from either a multi-year or a record-high level, most sector ERRs remain above average except for Staples, Energy, Telecom, and Real Estate."
But, it's buyer beware right now.
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