Home Doll market S&P 500 earnings: forward revisions still negative

S&P 500 earnings: forward revisions still negative



Forward EPS estimates were revised down again this week, a revision action that is not encouraging. What’s puzzling is that – thinking back to the 4th quarter, the correction of 2018 after Powell raised rates since the fourth quarter of 2016 – the last cycle of monetary tightening – the S&P 500 rolled almost exactly when the FFQE “provisional estimate over 4 quarters” was renewed.

In 2022, not so much.

One reason could be that the stock market started to correct almost 75 days before the first fed funds rate hike in 2022. Moreover, it took about 5 months and 2 weeks to get to the 24% correction in 2022, while the speed of the correction in the fourth quarter of 2018 was not even 12 weeks.

Pay attention to prices, not forecasts: negative revisions are worrisome, but perhaps the earnings correction was fully discounted by mid-June 22.

S&P 500 EPS data:

(Source: BIES data by Refinitiv)

  • The forecast estimate over 4 quarters (FFQE) fell to $234.05 this week from $236.83 last week and now sits $7 below its July 1, 2022 peak of $241.22;
  • The P/E ratio on the forward estimate is now 17.7x;
  • The S&P 500 earnings yield is now 5.65%, down from its peak of 6.31% on July 1;
  • The upward quarterly estimate for Q2 22 rose to $57.44 from $56.09 last week for a sequential increase of 2.04%.

The street or sell-side consensus thinks the S&P 500 earnings data for the second quarter of 2022 is stronger. This bottom-up quarterly estimate has risen nicely since early July, and check out this weekly-updated chart from the Refinitiv Earnings Dashboard:

S&P 500 EPS earnings growth rate

S&P 500 EPS and revenue growth rate (Author)

Columns 1 and 4 are “expected” Q2 22 EPS and revenue growth for the S&P 500. Now look at Q3 22 EPS and revenue growth and beyond and note the changes in growth rates expected since July 1 22. Revisions to expected growth rates continue to be lower, but jumping.

Quarterly ascending and descending data:

Quarterly bottom-up and top-down data

S&P 500 Expected EPS and Earnings Growth (Author)

  • The S&P 500 EPS 2023 estimate peaked at $251.99 the week of June 17, 2022 and fell to $244.36 or 3% on August 5, 2022.
  • The S&P 500 EPS 2022 estimate peaked at $229.57 the week of June 17, 2022 and fell to $225.50 or 1.8% on August 5, 2022.

What’s interesting about this data is that the S&P 500 estimates peaked the week of June 17, almost exactly coinciding with the 10-year Treasury yield’s peak of 3.50% and the S&P’s trough. 500 of 3,636.87.

The CPI and PPI data next week remain very important:

Briefing.com expects Wednesday’s headline CPI to be +0.3%, while CPI – Core is expected at +0.6%, which I had to look at twice to make sure this had been read correctly. Thursday’s PPI expects +0.3% and +0.4% respectively.

The PCE data last week came exactly in line, and no better, so that was a slight disappointment.

Gasoline accounts for 2-3% of the average US household budget. Gasoline’s steady decline should therefore be of some help with such a strong employment report in July.

Summary / Conclusion:

The spike in the S&P 500 EPS forward estimates coinciding with the S&P 500 trough in mid-June 22 is quite confusing since the 2018 tightening cycle showed that the Q4 2018 correction began almost precisely with the S&P peak. 500 in the provisional estimate at the end of September ’18. (Liz Ann Sonders and Bob Doll, then at Nuveen, called the coming top or correction in the S&P 500 almost exactly the end of September 2018.)

According to Briefing.com, Home Depot (HD), Lowe’s (LOW), Walmart (WMT) and Target (TGT) report their July 22 quarter from the week of August 15, 22.

With Walmart and Target having excess inventory, you’d think it should drive down the inflation numbers as prices are cut to get that inventory out of their stores, given that Target’s sales are the last year was $106 billion, Walmart’s expected fiscal 2023 revenue is $597 billion, and Amazon’s (AMZN) expected calendar year 2022 revenue is $522 billion . Between Amazon and Walmart alone, there’s over $1 trillion in expected revenue, in a $22 trillion economy.

This may be too easy an extrapolation, but if Walmart and Target wanted to fix their inventory problem, I wonder what pressure that would put on the CPI. (Just thinking out loud.)

Readers should also remember that this morning’s July 22 nonfarm payrolls report is NOT in the estimates released today by Refinitiv’s IBES data. The Refinitiv team I deal with – a great team, always responsive to questions – has been telling me for years that the data is cut from Thursday night. Would the jobs report alone send positive reviews? Probably not, but it would certainly (one would think) have an impact on consumer discretionary and consumer spending sensitive sectors.

We’re in a bit of a twilight zone in terms of economic data, earnings data, asset class behavior, and so on. etc wants to argue with me – that the greenback’s 20-year high on June 22 made a difference to the S&P 500 EPS and margin earnings, and that its weakening matters even more.

Until June 17 of this year, all we worried about was inflation, then after that it was recession and falling commodity prices, and now with the July jobs report, the scenario swings to “maybe the US economy is not that weak”, but we have to deal with Fed tightening (again) on September and November 22.

Take all of this with substantial skepticism. I am as puzzled as you. CNBC is loaded with those bulls and bears, but there’s nothing wrong with being in the middle and waiting to see which way the data and markets break.

Clients and readers know that my long-time favorite tech is Gary Morrow (@garysmorrow on Twitter) and he tells me that the 4115-4222 area on the S&P 500 is a key band. It represents the Feb 22 lows and a key Fibonacci level I believe. As someone who is not a technical person I am looking at the March 22 lows at 4161 to 4157 which were the lowest recorded for the S&P 500 just before the first rate hike on March 15th and then the strong end-of-quarter rally at the end of Q1 ’22. We broke above those levels on Wednesday and then fell back to just below them before the close.

Inflation has to be “better than expected” going forward to really help the stock and bond markets, because that’s the only thing the Fed and Jay Powell care about today.

Beware of everything. Look at how many predicted the July jobs report this morning (as in nobody). Truth be told, this kind of ratio is better for long-term stocks than for bonds.

Thanks for reading.

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Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.