Earnings season does not start until April 14, when the big banks begin reporting, but already the bears are saying expectations are too high. One of the issues that drives bears crazy is the refusal of analysts to slash earnings estimates for 2023. “Our research continues to indicate estimate cuts have not been enough, and certainly not typical at what we have observed at every major market bottom over the past thirty years,” said Nick Raich, founder and CEO of research firm The Earnings Scout, in a note to clients Tuesday. The bears’ frustration is understandable. The market tends to move ahead of analyst earnings cuts, but without some confirmation that profits are indeed coming down any selloff is likely to lose momentum. This is exactly what happened during the big selloff that culminated in the drop in the S & P in October of last year. Absent evidence the economy was indeed slowing, analysts refused to cut estimates. At least, not by much. Analyst estimates have indeed been coming down, but not dramatically. First-quarter estimates, expected to be $53.97 for the S & P 500 on Jan. 1, are down to $50.71, a drop of 5% from the first quarter of last year, according to Refinitiv. Full year 2023 estimates, which started at $229.24 on Jan. 1, have fallen to $220.45, up a measly 1.2% from last year, with virtually all of the gains expected in the fourth quarter. These estimates from analysts are known as “bottoms-up” estimates, because the estimates come from an analysis of individual companies. The other type of earnings estimates come from strategists who employ “top-down” analysis that looks not at individual companies but at an analysis of the macro economy. Those strategists, on aggregate, are far more bearish than their “bottoms-up” brethren. I’ll get into this more as we get closer to earnings season, but here’s an example from Wolfe Research’s Chris Senyek. “Recent earnings season trends are consistent with an economy that is significantly slowing and likely entering a recession this year,” he said in a note to clients this morning. “We continue to forecast S & P 500 Operating EPS of $190 for 2023E and $210 for 2024E.” Wow. $190 is about 14% below the current analyst consensus of $220. That is bearish even by “top-down” strategist standards, but there are many other strategists that have estimates in the $200-$210 range, which means most are expecting to see earnings decline 5% to 10% this year. That would be the first decline in earnings since the Covid year of 2020, when earnings fell 14%. That fight — between a flattish year for earnings and a down 10%+ year — is the primary battleground for stocks. It’s the soft landing vs. the hard landing crowd. More to come on this in the next couple weeks.
