Be on guard for S&P 500 earnings estimates to finally come under the knife
Even as the benchmark US stock index tumbled, 12-month forward earnings estimates kept rising.
A curious thing happened on the S&P 500’s road to a 10% correction: earnings estimates went up.
From the benchmark US stock index’s February 19 record close through today, 12-month forward earnings estimates have ground about 0.7% higher while stocks swooned. Unlike the S&P 500, forecasts for where earnings per share will be in a year’s time are still at records.
Now, is this even more evidence that the stock market’s downdraft is primarily a momentum-driven phenomenon? Not really. Or at least, not yet. That’s because analysts are notoriously slow to revise earnings estimates to the downside. There’s typically a decent lag between how quickly the stock market incorporates negative fundamental news (immediately) compared to Wall Street’s bean counters (slowly, after double-counting all the beans and hoping things changed for the better in the interim).
That being said, when you get a stock market downdraft of this magnitude, you’d usually expect earnings estimates to come under some pressure soon. (That’s because, despite what anyone else might tell you, the stock market is the economy. Or at the very least, it’s not not the economy.)
In a past life, I flagged how every recent US pullback of note didn’t end until earnings estimates started to get cut. (That was to make the case for why it was unlikely that stocks had truly bottomed in June 2022; indeed, the trough came in October of that year.)
The US economy has been cooling for a long time, and profit growth attributable to the AI boom (while still rapid) is decelerating. The size and scope of tariffs that may be pursued by the Trump administration is still a known unknown. But for this stock market episode to morph into a true growth scare and for tariffs to metastasize from a hit to confidence to a hit to earnings, we’re probably going to need to see that show up in profit forecasts before too long. We know retail guidance was brutal, for instance, and some in the space didn’t even include tariffs in their forward outlook.
The coming month will bring us squarely into the heart of the Q1 earnings season, prime time to be reevaluating the near-term outlook for Corporate America.
