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Tuesday, June 7, 2022
Today's newsletter is by Myles Udland, senior markets editor at Yahoo Finance. Follow him on Twitter @MylesUdland and on LinkedIn.
Earnings season may be done, but corporate results are set to be the stock market's next big problem. Again.
In a note to clients published Monday, Morgan Stanley strategist Mike Wilson noted revisions to corporate profits keep dropping. And while revisions haven't quite gone negative, Wilson thinks investors will soon realize their own expectations for next year are simply too high.
"Over the past several months, we've been highlighting the declining trend in earnings revision breadth," Wilson wrote. "We thought it would turn outright negative during Q1 earnings season and that's where we are. However, it's been a slow bleed toward 0%. This is why forward 12 month EPS estimates continue to grind higher for the S&P 500."
Wilson also noted that the preceding chart — which measures the difference between how many company forecasts are being raised versus cut — actually flatters the current state of play.
With the price of oil and commodities rising, 2022 earnings forecasts for the Energy (XLE) and Materials (XLB) sectors have risen 55% and 12%, respectively, over the last three months. No other sector in the S&P 500 (^GPSC) has had positive earnings revisions better than 2% over that timeframe.
"Time will tell, but we are still of the view that EPS forecasts will come down," Wilson stated.
Speaking to Yahoo Finance Live on Monday, Citi strategist Scott Chronert echoed Wilson's view, saying the impact of rising interest rates on the stock market has "mostly run its course."
"The issue from here becomes the move away from a valuation focus to... an earnings expectation focus," Chronert said. "And here, we're of the view that we're probably still looking at some downward revision risk to the second half of '22." Adding that a recession, were it to materialize as the Fed raises rates to tamp down inflation, "would really be a '23 earnings event, in our view."
As we've written in this space before, what really drives markets is not realized economic or earnings growth, but the expectations — and the change in those expectations — for these inputs.
And while the stock market so far this year has certainly been under pressure, in Chronert's outline the pressure that has been applied to stocks has come from interest rates and inflation. Which means any pressure applied from earnings has yet to be felt. And it's little wonder why — earnings forecasts are still mostly higher.