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Our Economic Ocean Liner Is Taking a Turn for the Worse

A softening economy will eventually influence earnings and stock prices

Robert Johnson, CFA 25 October, 2016 | 9:00
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Economic data did little to dispel the uncertainty, as most of this week's data was inconclusive, despite a lot of releases. With the GDP report due next week, the consensus estimate GDP forecast of 2.8% is uncomfortably high. We believe the actual result will likely split the difference at 2.4%. The more important year-over-year third-quarter GDP growth rate is likely to hover very near the 1.3% growth rate of the second quarter--near recovery lows.

Offsetting this glum GDP analysis, earnings news was generally better than expected during a week with a lot of reports. The new blended average forecast for S&P 500 earnings calls for a decline of just 0.3%, better than the 1.8% decline being estimated just last week. With just a few more upside earnings surprises, final third-quarter earnings could end up being positive for the first time in six quarters. However, the energy sector is weighing down those figures. Without energy, only the second quarter of 2016 showed a decline, and growth of 3.4% is being anticipated for the third quarter. So as queasy as I feel about the economy, earnings seem to be looking up a bit, and merger and acquisition news heated up, too.

Still, a softening economy will eventually influence earnings and stock prices. Poor economic news might also keep interest rates lower for longer, which could at least temporarily excite markets. So despite a slowing economy, markets still might hold together--though that is not a chance I am willing to take.

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About Author

Robert Johnson, CFA  Robert Johnson, CFA, is director of economic analysis with Morningstar.

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