Market Overview

The Upcoming Earnings Problem That Could Plague Stocks

The Upcoming Earnings Problem That Could Plague Stocks

The stock market faces a major headwind that could call into question the sustainability of the current bull run: 2018 earnings.

Third-quarter earnings seasons is ramping up this week with many big banks on deck to report their results.

Many analysts and investors aren't worried, Chad Morganlander, portfolio manager at Washington Crossing Advisors explained during a recent CNBC "Trading Nation" segment. It's the 2018 earnings and revenue growth that remains concerning, for one simple reason: stocks are correlated with earnings.

In fact, there is an 80–90-percent correlation between earnings and the performance of stocks. So when revenue and earnings growth accelerate, as has been the case as of late, then stocks move higher. But earnings and revenue growth for S&P 500 companies in 2018 are likely to come in lower than current consensus estimates imply, Morganlander explained.

A major contributor for this belief stems from the oil and gas sector, he continued. The sector has contributed "substantially" to earnings growth this year as commodity prices improved. But this may not be the case over the near-term as oil and gas prices will fall and the sector will become a "drag" to the market.

On top of that, global growth expectations will likely be revised lower in the coming months which will also be an "anchor to driving expectations lower."

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