What Earnings Estimate Declines Mean for Markets

Earnings estimates for the second half of 2022 and full-year 2023 are dropping—does that mean stock prices are set to plummet? [Mitch on the Markets] Earnings Estimates are Falling – What That Means for Markets 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’ve seen since Q2 2020, when analysts were scrambling to factor in the impact of the Covid-19 pandemic.1 Source: Zacks Investment Research --------------------------------------------------------------- [What Other Data Should You Be Watching?]( In addition to earnings, there are other key economic indicators investors should keep an eye on to better navigate the market and protect your investments for what’s to come. Instead of making daily decisions based on “what if’s”, I am offering all readers our just-released Stock Market Outlook report. This report will help you keep an eye on economic data releases, earnings reports, and other key economic factors, such as: - View on equity markets - Zacks forecasts at a glance - Fundamentals that the U.S. stock markets are pricing in - What’s Next for the Market? - And more… If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today! [IT'S FREE. Download the Just-Released October 2022 Stock Market Outlook 2]( --------------------------------------------------------------- Q3 earnings estimates have been cut for 14 of the 16 Zacks’ sectors over the past several weeks, with the biggest declines coming in Consumer Discretionary, Consumer Staples, Technology and Retail. Given the U.S.’s status as a service and consumption-based economy, these are key sectors where we generally don’t want to see earnings coming down. It’s also worth noting that nearly half of S&P 500 companies mentioned ‘recession’ on their post-earnings conference calls in Q2, which is far more than we see in a typical quarter. 3 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’ll see earnings growth this year and next – it’s just much slower growth than was anticipated at the beginning of the year. Source: Zacks Investment Research 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. Investors who have been following these earnings trends or are perhaps reading about them now may be thinking: this can’t be good for markets going forward. 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. But that’s 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 – which was the last time earnings estimates fell by as much as they are falling now (see chart below) – 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: Source: Federal Reserve Bank of St. Louis 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’ve been seeing over the past few weeks. There’s an old saying that “bull markets are born on pessimism,” which is what I think investors should be looking for now. Bottom Line for Investors 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’s 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’re likely to continue seeing estimates coming down in future weeks and months, but I don’t see an action item for investors – much of this weakness is already priced in. To help you get a better look at data that can help you protect your investments through market changes, I am offering all readers our [Just-Released October 2022 Stock Market Outlook Report]( 4, which contains some of our key forecasts and factors to consider such as: - Sell-Side and Buy-Side Consensus - Zacks Rank August Industry Tables - Zacks Forecasts at a Glance - What’s Next for the Market? - And much more… If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today! [IT'S FREE. 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