Analysts Predict A Gloomy First Quarter

After last week's strong first quarter (with the S&P 500 up over 7%), I remarked that almost invariably by the end of the year, the S&P 500 is up even more than it was at the beginning of the year. 

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This memo has not been passed on to the strategists. 

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There is a bit of a gloomy feel among the strategist community as we enter the first quarter earnings season and look forward to further gains for 2023. 

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In a note to clients on Tuesday morning, Brian Belski, who is typically bullish, expressed his relatively tempered view on the potential for stocks to perform well this year. In spite of the fact that our 4,300 2023 S&P 500 price target still implies a decent upside from current prices, we are confident that stocks are unlikely to reach any of their all-time highs that were set in early January 2022 despite the fact that our 4,300 2023 S&P 500 price target implies a decent upside from the current price levels.

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The same is true for Wells Fargo's Chris Harvey, who noted Tuesday that the S&P 500 is on its way to reaching its year-end price target of 4,200. "[We] are expecting a 10% correction in the SPX trading down to 3700 over the next 3-6 months. The risk/reward ratio over the next six months is skewed to the downside." 

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Even worse, earnings estimates are being openly attacked by strategists, and not just for the first quarter. Second-half estimates, which are currently higher than first-half estimates, are also being disparaged.

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The race for "lowest estimate on the Street" for 2023 earnings appears to be a race to the bottom.

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The Canaccord Genuity analyst Tony Dwyer said Tuesday morning that earnings assumptions for 2023 remain too high, and valuation is unclear because of inflation. The consensus estimate of $210/share for the S&P 500 Operating EPS should prove overly optimistic if we do indeed go into recession later this year [street consensus is $219]. We expect consensus to reduce as corporate guidance is released over the next few weeks.

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There is a reason for skepticism because analysts are only expected to see flat earnings this year, and making very optimistic assumptions about the second half is the only way to get there. 

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Earnings trough in Q1 of 2023

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Q1: $50.63

Q2:  $54.13

Q3:  $56.84

Q4:  $58.32

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As a result, 2022 printed $219.83, just a little bit more than 2022's $218.09. Nevertheless, the second half of the year is filled with optimistic expectations. Fourth quarter ($58.32) and third quarter ($56.84) records would be set. 

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A modest economic downturn seems to have largely affected those results, particularly in the fourth quarter. In terms of earnings, there is a "soft landing." 

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DataTrek's always-astute Nicholas Colas noted Tuesday that earnings can reach record levels in the back half of the year. 

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Considering Colas' $210 estimate is more realistic than the current analyst estimate of $219, it's not surprising that most strategists agree: in the $200-$210 price range.  There are a few estimates at $190, which isn't even close to the low estimate on the Street. 

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Despite Colas' $210 price, he seems optimistic. 

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