{"id":9283,"date":"2022-09-26T17:04:44","date_gmt":"2022-09-26T17:04:44","guid":{"rendered":"https:\/\/zacksim.com\/financial-professionals-insights\/?p=9283"},"modified":"2022-09-26T17:04:45","modified_gmt":"2022-09-26T17:04:45","slug":"what-earnings-estimate-declines-mean-for-markets","status":"publish","type":"post","link":"https:\/\/zacksim.com\/financial-professionals-insights\/what-earnings-estimate-declines-mean-for-markets\/","title":{"rendered":"What Earnings Estimate Declines Mean for Markets"},"content":{"rendered":"\n

Earnings estimates for the second half of 2022 and full-year 2023 are marching lower. On July 1, earnings growth for S&P 500 companies was expected to be +7.6% for the third quarter. As I write, expected earnings growth has fallen to +1.2% for Q3, with the positive skew largely coming from big gains in the Energy sector. These are the biggest cuts (see chart below) to earnings estimates we\u2019ve seen since Q2 2020, when analysts were scrambling to factor in the impact of the Covid-19 pandemic.1<\/sup><\/p>\n\n\n\n

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Source: Zacks Investment Research<\/em><\/strong><\/figcaption><\/figure>\n\n\n\n

Q3 earnings estimates have been cut for 14 of the 16 Zacks\u2019 sectors over the past several weeks, with the biggest declines coming in Consumer Discretionary, Consumer Staples, Technology and Retail. Given the U.S.\u2019s status as a service and consumption-based economy, these are key sectors where we generally don\u2019t want to see earnings coming down. It\u2019s also worth noting that nearly half of S&P 500 companies mentioned \u2018recession\u2019 on their post-earnings conference calls in Q2, which is far more than we see in a typical quarter.2<\/sup><\/p>\n\n\n\n

Earnings weakness is expected to persist in Q4 and into 2023, with estimates in decline for these periods as well. As you can see on the chart below, there is still a consensus that we\u2019ll see earnings growth this year and next \u2013 it\u2019s just much slower growth than was anticipated at the beginning of the year.<\/p>\n\n\n\n

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Source: Zacks Investment Research<\/em><\/strong><\/figcaption><\/figure>\n\n\n\n

Analysts and market participants have been factoring in the earnings impact of rising interest rates and sticky inflation, and how the two are coming together to possibly push the U.S. into a recession. Even a stronger dollar has many analysts worried, as it can adversely affect sales that multinationals make abroad. While caution over corporate profitability started to appear in earnest in Q2, it has hit stride over the last few weeks. <\/p>\n\n\n\n

Investors who have been following these earnings trends or are perhaps reading about them now may be thinking: this can\u2019t be good for markets going forward. <\/em>There is a growing sense that falling earnings and earnings estimates must mean falling stocks, which for some investors also means considering changes to portfolio positioning.<\/p>\n\n\n\n

But that\u2019s not really how markets work. For one, U.S. stocks are already in a bear market, so weaker economic and earnings growth ahead is likely being priced into stocks now, at least to a degree. Consider what happened with earnings estimates in the early days of the pandemic. In the beginning of Q2 2020 \u2013 which was the last time earnings estimates fell by as much as they are falling now (see chart below) \u2013 analysts were slashing earnings forecasts to factor in the impact of the pandemic. But by the time earnings estimates started coming down, the bear market was already over:  <\/p>\n\n\n\n

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Source: Federal Reserve Bank of St. Louis<\/em><\/strong><\/figcaption><\/figure>\n\n\n\n

Analysts are now starting to factor in the impact of higher rates on spending and earnings, but I would argue that the impact on markets has already been felt to a large degree. I would also expect the market to rally when expectations and sentiment about earnings and the economy are low and\/or falling, which is what we\u2019ve been seeing over the past few weeks. There\u2019s an old saying that \u201cbull markets are born on pessimism,\u201d which is what I think investors should be looking for now.<\/p>\n\n\n\n

Bottom Line for Investors<\/strong><\/p>\n\n\n\n

Earnings gloom is gaining steam in Q3, which is arguably helping U.S. corporations since falling expectations mean there is a lower hurdle to clear for companies to do better than expected. That\u2019s what we saw in Q2, when companies proved pretty resilient in the face of inflation and weaker growth, and the earnings season turned out to be better than expected (with stocks holding up over the summer months). We\u2019re likely to continue seeing estimates coming down in future weeks and months, but I don\u2019t see an action item for investors \u2013 much of this weakness is already priced in.<\/p>\n","protected":false},"excerpt":{"rendered":"

Earnings estimates for the second half of 2022 and full-year 2023 are dropping\u2014does that mean stock prices are set to plummet?<\/p>\n","protected":false},"author":4,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[181,1],"tags":[],"class_list":["post-9283","post","type-post","status-publish","format-standard","hentry","category-financial-professionals","category-mitch-on-the-markets"],"acf":[],"_links":{"self":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/9283","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/users\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/comments?post=9283"}],"version-history":[{"count":2,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/9283\/revisions"}],"predecessor-version":[{"id":9288,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/9283\/revisions\/9288"}],"wp:attachment":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/media?parent=9283"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/categories?post=9283"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/tags?post=9283"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}