Byron Wien, vice chairman and investing guru at Blackstone Group, thinks that the market will look pretty bleak for the rest of the year.
“We are having a profit problem in the US this year, and I think you’ll see it,” Wien said in a webcast on Thursday.
Wien’s presentation included a bleak revenue outlook for 2016 of only a 1.7% increase. If you take energy companies out of the equation, then estimated revenue growth is at only 2.9%.
“Now 2.9% growth – if profit margins are contracting – is not a good situation for profitability,” Wien said.
Similarly, if you take out energy stocks, then profits are expected to expand at 4%. But with energy stocks in, that estimated growth is at only 1.4%.
“Everyone thinks first quarter is the trough – it may be the trough – but I still think we’re going to have earnings problems throughout the year, and that’s why I think there’ll be a down equity market for 2016,” Wien said.
Corporate America has been mired in an earnings recession thanks to swings in the dollar, oil prices, and weak domestic and global growth. Liz Ann Sonders, chief investment strategist at Charles Schwab, had explained why she thinks that the first quarter may have marked the inflection point of the earnings recession.
The main problem is wage growth, according to Wien.
Modest revenue growth, coupled with a lack of pricing power among companies, means that margins have to be squeezed as wages climb.
“Profit margins are coming down and labor share of corporate GDP is going up,” he said. “So my view is that there’s a margins squeeze going on. You saw it in the first-quarter earnings, and I think you’ll see it manifested throughout the year.”
He also thinks that a correction is likely because of high stock market valuations and investor euphoria, although a bear market and recession are unlikely to happen.
“We’re about one standard deviation above the median in terms of trailing 12-month earnings,” he said. “I don’t think we’re in bubble territory – which occurs 25 to 30 times earnings – and we’re not there.”