Most of the talk on US equities is still centered around whether and when the Fed will start scaling back its asset purchases (let alone start raising rates). The point here is of course that if the Fed decides to remove the punchbowl, equities will take a dim view.

We would certainly agree that earlier than expected tapering could lead to a wobble in equities. However, if swifter than expected normalization of policy was introduced due to an improving economy, equities should benefit beyond initial withdrawal symptoms.

One thing though which is not really being discussed as a potential catalyst for equity weakness in coming months is earnings. This is a mistake in our view. Looking closer at US equities, earnings should start to impact prices.  EPS growth is now almost negative, and this often provides a headwind for prices.

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Profit margins, as proxied by corporate profits as percentage of GDP, tend to be mean reverting and lead profit growth.  The relationship suggests profit growth should start to fall quite sharply in the coming months and quarters.  This will be another hindrance for earnings.

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Already this quarter we are starting to see companies guide analyst estimates down.  If we look at the ratio of negative guidance relative to consensus vs positive guidance relative to consensus, it is the highest it has been in at least 3 years. So although earnings results may now exceed expectations, they are decaying, and look like they will continue to decay, such that US equities will face a more challenging environment.