Beyond Numbers: Reevaluating Stock Market Decisions Without Reliable Earnings Guidance

The Stock Market as a Random Walk

Economist Burton Malkiel famously described the stock market as “a random walk,” implying that its movements are unpredictable. Despite this, investors often rely on earnings guidance from companies to navigate their investments. Currently, however, many find themselves navigating in the dark.

BMW’s Optimism Amidst Uncertainty

Last week, BMW reiterated its financial outlook for 2025, originally set in mid-March. The company’s guidance hinges on the assumption that the Trump administration will reverse some recent tariff increases starting in July. BMW Chairman Oliver Zipse expressed confidence that, “free trade across the U.S., Mexico, and Canada will be restored,” suggesting the implications of tariffs are too burdensome for all parties involved.

Global Trade Considerations

Following a recent agreement to suspend most tariffs between the U.S. and China, there may be some basis for Zipse’s positive outlook. However, Deutsche Bank’s equity analysts were less optimistic after reviewing the earnings report. They noted, “it’s clear not everyone shares BMW’s confidence” in the current market climate.

Corporate Earnings Guidance

While BMW’s approach may be atypical, it reflects the broader uncertainty in economic forecasts. Unlike BMW, several corporations, including Ford, Stellantis, Delta Air Lines, and UPS, have eliminated their 2025 guidance altogether. Companies such as General Motors, PepsiCo, and Procter & Gamble have lowered their projections, while Volkswagen has opted to exclude tariffs from its forecasts altogether.

Interestingly, United Airlines presented two scenarios in its guidance—one reflecting a stable economy and another anticipating a recession.

Wall Street’s Earnings Expectations

Currently, Wall Street anticipates a growth of 8.9% in earnings-per-share for the S&P 500 over the next twelve months, correlating to a forward price/earnings ratio of 20.6. While this figure aligns with the historical averages of the past five years, many analysts warn that they might be overly reliant on corporate forecasts that could be misleading, indicating the potential for the market to be more overpriced than it may appear.

Economic Outlook Amidst Corporate Uncertainty

Goldman Sachs, in its latest projection before recent agreements with the U.K. and China, estimated a 45% chance of a recession within the next year. Nearly entering a bear market in early April, the S&P 500 has since rebounded to just 0.6% off its year-start mark. This swift recovery raises questions about the sustainability of current market conditions.

Challenges Ahead for Analysts

While the threat of recession appears diminished compared to a month ago due to President Trump’s less aggressive trade stance, April’s job market data belied our predictions of a “soft” market. Analysts remain aware of impending risks; despite robust first-quarter earnings, they revised second-quarter estimates downward by 2.4%, a significant adjustment compared to standard practices. Additionally, more substantial downgrades for forecasts beyond a year from now are often indicative of a cooling economy.

Investors Weighing Risks of Economic Slowdown

Some analysts suggest that investors are beginning to account for potential economic downturns while also weighing the possibility of renewed growth as U.S. consumers and businesses transition through challenging periods. However, this approach raises skepticism since confirmed tariff permanence will heighten import costs, forcing companies to either absorb lower margins or raise prices—both of which may negatively impact sales.

Market Valuations and Future Expectations

Notably, forward profit expectations for the S&P 500 and technology stocks were already being downgraded before the trade tensions escalated. Historically, recessions have seen earnings decrease by 20% or more. Assuming earnings-per-share growth merely reverts to the five-year average of 7.9%, and the forward P/E ratio aligns with its recent highs around 22, the S&P 500 would indicate only 6% upside potential—a modest return compared to risk-free cash yields of 4%.

The Shift Towards Trailing Earnings

Rather than fixate on uncertain forecasts, investors are likely to pivot towards trailing earnings, as these provide a more concrete representation of company performance, according to industry experts. Evidence of this shift is seen in the performance of “value” stocks, which had lagged behind high-growth tech shares for years but have begun to show stronger results this year, aside from a recent rally initiated by technology stocks.

Value Versus Growth Stocks

With diminished hope reflected in value stocks, many believe their valuations offer a buffer, unlike growth stocks that heavily rely on future potential. This scenario may contribute to a generally bearish market outlook, particularly since the anticipated benefits of artificial intelligence remain central to the investment thesis in the U.S. However, if past trends hold, current valuations measure as precariously high, reminiscent of the dot-com bubble.

Investment Strategies Going Forward

Wall Street veteran Jim Paulsen advocates adherence to a post-World War II principle where S&P 500 returns have consistently followed a median logarithmic line. Although the current trajectory is not reminiscent of the euphoric levels seen in 1999, reverting to historical trends indicates a potential decline of approximately 20% over the next year.

Quality Companies and Diversification

In these turbulent times, diversifying one’s investments and favoring “quality” companies—those with robust balance sheets capable of weathering volatile conditions—may be prudent. It’s advisable to steer clear of exposure to companies primarily focused on China, such as Apple, while maintaining investment in market stalwarts like Costco, Meta Platforms, and Mastercard.

Conclusion

While the paths available to today’s investors are fraught with uncertainty, they may not yield significant gains in the near future. As market conditions continue to evolve, careful analysis and strategic planning will be essential for navigating the complex landscape ahead.