Profit Expectations Crash… Here's What It Means

It's time to "look over the shoulders" of the pros – and find out what they expect to happen in the markets next...

A total of 232 fund managers recently gave their thoughts on the current market. They do it every month for the Bank of America Global Fund Manager survey...

This survey gives us a glimpse at how real money managers feel about the markets. It tells us what they're focusing on and what they think could happen next.

This month, the number of fund managers expecting a rise in profits took a dive. It's at the lowest level in more than a year.

This isn't something to worry about, though. A sharp drop in profit expectations doesn't mean stocks will do poorly. In fact, the opposite is true.

Let me explain...

Asking individual investors what they think of markets can reveal some insights. But mom-and-pop investors aren’t the ones moving markets.

That's why the Bank of America Global Fund Manager survey talks to the pros... These are fund managers who oversee $700 billion in assets under management. And thanks to the BofA survey, we can get a glimpse into what they are paying attention to.

The survey asks these folks just about everything... what they see as the biggest risk to the market, what they expect for inflation, and even how much cash they hold in their portfolios.

What's interesting is when we see extremes in the data. And that's exactly what happened this month regarding profit expectations...

In March 2021, more than 80% of these managers expected profit increases for companies going forward. It was the highest rating in decades. And they were right...

Companies crushed earnings season in both the first and second quarter of 2021. Now, though, these same managers aren't nearly as bullish on profits as they were earlier this year.

Currently, just 41% of fund managers expect higher profits. That's the lowest level in more than a year and a massive reversal since March.

Essentially, profit expectations have dropped off sharply. But that doesn't mean stocks won't perform well in the coming months.

We've seen similar drops in expectations two other times... in 2002 and again in 2009. But stocks continued to soar both times...

Both of these cases were at the start of multiyear bull runs. U.S. stocks rallied from 2002 until their peak in 2007. And the 2009 bull run went on for more than a decade before the pandemic sent the market down 33%.

In short, profit expectations have crashed. The pros don't expect the spectacular profit growth we've recently seen. But that doesn't mean we should panic about future stock performance.

We could still see the U.S. market hit even higher highs from here. And that means you want to stay long.

Good investing,

Chris Igou

Further Reading

"Wall Street analysts and strategists have been slow to embrace the magnitude of the economic rebound," C. Scott Garliss writes. As a result, companies have shattered expectations so far in 2021. And that winning streak isn't over yet... Learn more here.

Everyone has been worried about one issue lately: inflation. But a closer look at the markets shows that the "boogeyman" of today's market isn't here to stay... Read more here.

Market Notes

Today, we’re looking at a company that’s thriving as folks continue to work from home…

While there are some folks who have been returning to their offices, there are still many people who are continuing to work remotely due to COVID-19, especially given concerns about the Delta variant. But with more services available online in the “cloud,” teleworking has become more manageable. Today’s company helps human resources teams work from home…

Paycom Software (PAYC) is a $30 billion software company. Its tools help with hiring, payroll, and other HR services. And because its software is based in the cloud, users can access its services anywhere in the world with an Internet connection… perfect for the current teleworking boom. In its latest quarter, Paycom grew its revenue 33% year over year – bringing in $242.1 million.

As you can see, PAYC shares are up more than 220% over the past three years… and they just hit a fresh all-time high. As companies continue to navigate the teleworking space, Paycom’s software should remain invaluable…