Bank Strategists Say U.S. Earnings Estimates Too Optimistic

U.S. bank strategists are warning that U.S. profit margin estimates are too optimistic, which puts stocks at risk of more declines when analysts downgrade their expectations.  U.S. stocks are currently in a bear market, with the S&P 500 Index ($SPX) (SPY) headed for its worst first half of a year since 1970. 

Despite this year’s plunge in stocks, analysts are still bullish about corporate earnings expectations, with net margin estimates for S&P 500 companies still at a record high.  Goldman Sachs said Monday, "while rotations within the equity market have signaled expectations of slowing growth, index valuation does not appear to be providing a buffer for the uncertainty around the path of future earnings.”

HSBC Plc said that equity markets are still underpricing the impact of a potential recession, while earnings and growth expectations are at risk of being revised lower.  Morgan Stanley also said analysts need a reality check about their earnings projections for this quarter as “economists have begun to cut their top-down economic forecasts for GDP, and yet fundamental company analysts are sitting like deer in headlight not knowing what to do with numbers.”

Analysts have further increased their 2022 forecasts over the past month.  Data from Bloomberg Intelligence show they expect companies in the S&P 500 to see profits grow by 10.7%, up from 10% a month ago and 8.7% at the start of the year.  The S&P 500 has tumbled about 18% this year amid mounting recession worries as the Fed boosted interest rates to combat inflation.

Morningstar said earnings revisions are a risk with the U.S. economy set to slow next year, though China emerging from pandemic restrictions could act as a global buffer.  Goldman Sachs expects aggregate S&P 500 net profit margins to remain flat in 2023, even if the economy doesn’t contract. The risk is lower for the ten biggest S&P 500 companies, which account for 19% of the index’s earnings. The energy sector will also be positive for aggregate index margins, benefiting from elevated energy prices.

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