Earnings season doesn’t begin till April 14, when the large 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 definitely not typical at what now we have noticed at each main market backside over the previous thirty years,” mentioned Nick Raich, founder and CEO of analysis agency The Earnings Scout, in a word 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 in the course of the massive selloff that culminated within the drop within the S & P in October of final 12 months. Absent proof the economic system was certainly slowing, analysts refused to chop estimates. Not less than, 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 all the way down to $50.71, a drop of 5% from the primary quarter of final 12 months, in response to 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 nearly the entire positive aspects anticipated within the fourth quarter. These estimates from analysts are referred to as “bottoms-up” estimates, as a result of the estimates come from an evaluation of particular person corporations. The opposite kind 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 economic system. These strategists, on combination, are much more bearish than their “bottoms-up” brethren. I will get into this extra as we get nearer to earnings season, however this is an instance from Wolfe Analysis’s Chris Senyek. “Latest earnings season traits are in line with an economic system that’s considerably slowing and sure coming into a recession this 12 months,” he mentioned in a word 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% under the present analyst consensus of $220. That’s bearish even by “top-down” strategist requirements, however there are a lot 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 will be the primary decline in earnings for the reason that Covid 12 months of 2020, when earnings fell 14%. That battle — 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 exhausting touchdown crowd. Extra to come back on this within the subsequent couple weeks.
