Before The Next Round Of Earnings Reports, Bears Contend The Numbers Need To Fall

It won't be until April 14 that the Big Banks start reporting their earnings, but already the bears are claiming that expectations are too high as the earnings season approaches.

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Bears are driving themselves batty because analysts refuse to slash their earnings estimates for 2023, which is one of the things that drive them crazy.

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According to the earnings research firm The Earnings Scout, in a note to clients on Tuesday, research indicates that estimate cuts made since the market bottomed over the past three decades have not been sufficient, as well as not typical of what has been seen at every major market bottom for the past thirty years.

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This frustration of the bears is understandable since the market usually moves ahead of analyst earnings cuts, but it is unlikely that any selloff will gain momentum without some proof that profits are indeed coming down. During the big selloff last October that resulted in the collapse of the S&P in October of last year, analysts did not cut estimates without evidence that the economy was in fact slowing down.

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Analyst estimates have indeed been decreasing, but not by a great deal. There has been some reduction in analysts' estimates, but not by much.

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In the first quarter of last year, the S&P 500 was expected to be $53.97, but according to Refinitiv, it dropped to $50.71, a decrease of 5% from $53.97 in the first quarter of last year. During the fourth quarter of 2023, the estimates for the full year 2023 have declined from $229.24 on Jan. 1 to $220.45, an increase of only 1.2% from last year, with virtually all of the gains expected to be realized in the fourth quarter.

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As a result of the fact that these estimates were generated from an analysis of individual companies, it has become known as a "bottoms-up" estimate.

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Another type of earnings estimate is provided by strategists, who utilize a "top-down" analysis, which concentrates on macroeconomic factors rather than on individual companies, in order to determine earnings estimates.

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There is no question that these strategists, on the whole, are much more bearish than their "bottoms-up" counterparts.

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In the coming weeks, I will expand on this topic as we approach earnings season, but for now, let me give you an example from Chris Senyek, a senior analyst at Wolfe Research.

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According to his note to clients this morning, recent earnings season trends suggest a slowing economy and possible recession this year. "We continue to forecast operating earnings per share of $190 for the S&P 500 for 2023E and $210 for 2024E."

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That's amazing. The current analyst consensus is $220, so $190 is about 14% below that. It is quite bearish even by “top-down” strategist standards, but there are a number of other strategists who are predicting earnings to decline by 5% to 10% in the coming year, which means that most are projecting earnings declines between $200 and $210 this year.

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It would be the first time earnings have declined since the Covid year of 2020 when earnings dropped by 14%.

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In most cases, a flattish earnings year versus a decline of 10%+ is the primary battleground for stocks as they fight for their survival. There are those who advocate for soft landings versus those who advocate for hard landings. The next couple of weeks will bring more information on this topic.

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