Earnings season doesn’t begin till April 14, when the massive banks start reporting, however already the bears are saying expectations are too excessive. One of many points that drives bears loopy is the refusal of analysts to slash earnings estimates for 2023. “Our analysis continues to point estimate cuts haven’t been sufficient, and positively not typical at what we’ve got noticed at each main market backside over the previous thirty years,” stated Nick Raich, founder and CEO of analysis agency The Earnings Scout, in a be aware to shoppers Tuesday. The bears’ frustration is comprehensible. The market tends to maneuver forward of analyst earnings cuts, however with out some affirmation that earnings are certainly coming down any selloff is more likely to lose momentum. That is precisely what occurred through the massive selloff that culminated within the drop within the S & P in October of final 12 months. Absent proof the financial system was certainly slowing, analysts refused to chop estimates. At the very least, not by a lot. Analyst estimates have certainly been coming down, however not dramatically. First-quarter estimates, anticipated to be $53.97 for the S & P 500 on Jan. 1, are right down to $50.71, a drop of 5% from the primary quarter of final 12 months, in line with Refinitiv. Full 12 months 2023 estimates, which began at $229.24 on Jan. 1, have fallen to $220.45, up a measly 1.2% from final 12 months, with just about all the positive factors anticipated within the fourth quarter. These estimates from analysts are often called “bottoms-up” estimates, as a result of the estimates come from an evaluation of particular person corporations. The opposite sort of earnings estimates come from strategists who make use of “top-down” evaluation that appears not at particular person corporations however at an evaluation of the macro financial system. These strategists, on mixture, are way more bearish than their “bottoms-up” brethren. I am going to get into this extra as we get nearer to earnings season, however here is an instance from Wolfe Analysis’s Chris Senyek. “Current earnings season developments are in keeping with an financial system that’s considerably slowing and sure getting into a recession this 12 months,” he stated in a be aware to shoppers this morning. “We proceed to forecast S & P 500 Working EPS of $190 for 2023E and $210 for 2024E.” Wow. $190 is about 14% beneath the present analyst consensus of $220. That’s bearish even by “top-down” strategist requirements, however there are lots of different strategists which have estimates within the $200-$210 vary, which suggests most expect to see earnings decline 5% to 10% this 12 months. That may be the primary decline in earnings because the Covid 12 months of 2020, when earnings fell 14%. That struggle — between a flattish 12 months for earnings and a down 10%+ 12 months — is the first battleground for shares. It is the smooth touchdown vs. the onerous touchdown crowd. Extra to come back on this within the subsequent couple weeks.
