Strategists Are Reducing Their Earnings Forecasts For 2023 Due To Shrinking Profits

March 2, 2023

minute read

Analysts are again beginning to reduce earnings estimates for the current quarter, which they refer to as the "incredible shrinking earnings story.".

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In the third quarter of last year, analysts began aggressively cutting their earnings estimates for 2023. Despite this, the rate of decline in January has slowed down and it appears to be resuming its downward trend in February.

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Estimates for S&P 500 earnings in 2023 show earnings shrinking fast

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June 2022: $252

Dec. 1: $231

Jan. 1: $229

Today: $222

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Credit Suisse analyst Jonathan Golub has lowered 2023 earnings estimates due to “margin pressures”.

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Compared to his previous forecast of $215 (consensus is $222) in 2023, the S&P 500 is now $210, a drop of 2.3% from his previous forecast of $215. Furthermore, the forecast for 2024 has been lowered from $230 to $210, which is a significant decline. As a result, there has been an 8.7% reduction in the number of people.

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“Multiples should flatline over the next few quarters as persistently high inflation, tightening monetary policy, and sub-par economic growth offset declining recession risk,” Golub wrote in a note to clients.

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As 2022 earnings have already been confirmed to be roughly $220, a large part of Wall Street now expects 2023 earnings to be flat to slightly negative, which is in line with the expectations of Wall Street.

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Despite flattish earnings expectations, there is a danger that they may be overly optimistic. The reason for this is that the story of flatlining earnings is based on the “soft landing” thesis, according to which inflation will come down in the second half, interest rate hikes will end and ease, and earnings will stabilize in the third quarter.

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That may not be the case. Inflation reports are moving in the wrong direction, so now we have the paradigm-changing from "Lower inflation, moderating rates = earnings stabilize in the second half" to "Higher inflation, higher rates = earnings decline again in the second half" as the inflation reports are going in the wrong direction.