Why aren’t earnings estimates falling? Mohamed el-Erian noted last week that the market is entering a new phase. “Initially this was a sell-off on interest rate fears and tightening financial conditions. Today it has all the elements to also be a growth risk,” he said on air. He’s probably right. We are in a growth fear that is reflected in profit worries. This is different than what we’ve seen so far this year. The stock market is declining as investors lower the multiple (P/E). This is multiples of what investors are willing to pay for a future stream of earnings and dividends. According to Refinitiv, the forward 12-month multiple of the S&P 500 has fallen from about 22 earlier this year to 16.4 today. That’s below the 5-year average (18.6) and below the 10-year average (16.9). El-Erian’s comment implied there could be another drop amid concerns about growth and earnings, but the analyst community doesn’t seem to have gotten the memo. Estimates for the S&P 500 rose last week, according to Refinitiv. Earnings estimates for 2022 today: $228.84 5/6 $227.50 Earnings estimates for 2023 today: $251.52 5/6 $250.53 (Source: Refinitiv) While much of the increase was due to higher energy estimates, a Most of the estimates for consumer staples, technology and communication services remain unchanged from a few weeks ago. The lone sector beginning to see valuation cuts is consumer discretionary. Why are analysts so slow to lower their estimates, and does that mean another drop is imminent? Nick Raich, who covers gains at Earnings Scout, agreed that most of the upward revisions in the S&P overall were due to revisions in energy stocks, but says that doesn’t explain why analysts in other sectors didn’t cut numbers. “The analysts in the other sectors are crazy,” he told me. “They were supposed to sink the numbers in the kitchen, dismantle them, and they didn’t.” Why not? “Because they behave like deer in the headlights, because companies don’t yet know exactly how inflation will affect their profits by the end of the year,” said Raich. Without more explicit guidance, analysts do little or nothing. It’s not that there aren’t enough analysts. Although the sell-side community has declined over the past 20 years, there are a lot of analysts out there and a lot of estimates. On average, about 20 earnings estimates are provided for the 500 stocks in the S&P 500, which means about 10,000 earnings estimates are made each quarter. Since most analysts cover multiple stocks, the total number of analysts is much smaller, around 1,700 according to Refinitiv, which would mean an average of around 6 companies per analyst. If El-Erian and many on Wall Street are right, these analysts will get a lot busier. For companies where analysts aren’t taking action, companies that report numbers may need to beat by a larger margin to see their shares move as the market bets many estimates will fall. What should long-term investors do when the S&P 500 is on the verge of bear market territory? Join us on Monday at ETF Edge when Gerard O’Reilly, Co-CEO of Dimensional, will be our guest. Dimensional has $659 billion in assets under management. They’re not stock pickers, but they try to outperform the market by systematically pursuing sources with higher expected returns, which they’ve uncovered through decades of rigorous scientific evidence. We will talk about the dangers of market timing, understand your risk profile and how they generate alpha for their clients. Also joining us is Dave Nadig, financial futurist at VettaFi’s, the newly rebranded company formerly known as ETF Trends.
