Halfway through 2023 Wall Street still can’t agree on the earnings outlook
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Morgan Stanley’s Mike Wilson raised eyebrows Monday when he insisted that earnings for the S & P 500 would turn out to be disappointing this year, targeting an estimate of $185-$195 for full year earnings. That is well below not only what his fellow strategists are anticipating, but also well below what analysts are projecting. So far, Wilson has been consistent in estimating earnings would be disappointing. He has also been wrong. Tuesday, Goldman Sachs’ Jan Hatzius lowered his estimate of the chances of a U.S. recession this year, giving further support to those in the “soft landing” camp. A strange year: Halfway through, there is a wide difference of opinion on earnings Strategists analyze the macroeconomy to come up with an estimate for corporate earnings. There are only a few dozen of them, but there comments are carefully scrutinized by traders. Sell-side analysts work for investment banks or brokerages. They analyze individual company performance to come up with earnings estimates, which are then aggregated into an overall estimate by agencies like FactSet or Refinitiv. There are over one thousand sell-side analysts. There is always differences of opinion, but the differences of opinion this year are unusually wide. What makes this all very strange is that we are halfway through the year already. Much of the earnings have already been reported. Yet here we are, with a very wide range of opinions. How wide? The S & P 500 reported $218 in earnings in 2022, according to Refinitiv. For 2023, among the two dozen or so strategists that offer earnings estimates, the numbers range from $230 at the high end to Mike Wilson’s $185-$195 at the low end. That means that strategists expect earnings to be anywhere from up 5.5%, to down 15.1% in 2023. That is a very wide range of opinions. Remember, we are already halfway through the year. Here’s where a few of the players stand. S & P 500: 2023 S & P 500 earnings estimates John Stoltzfus, Oppenheimer: $230 Goldman Sachs (David Kostin) $224 BMO (Brian Belski) $220 Credit Suisse (Jonathan Golub) $215 RBC (Lori Calvasina) $200 BofA (Savita Subramanian) $200 Wells Fargo (Chris Harvey) $200 Ed Clissold, Ned Davis $186 Source: Bloomberg (as of May 18) The average estimate is $209, which would be a decline of 4.1% over 2022. Analysts: Slower to move, but so far they have been right Contrast this to the analyst community. They have a current estimate of $219, an increase of about 1% compared to 2022. That estimate has not changed appreciably for several months. This highlights the difference between analysts and strategists: Analysts have models for earnings of individual companies, not the macroeconomy as strategists do. Analysts are reluctant to suddenly start slashing earnings estimates due to a “recession” that may or may not materialize, or before the impact of any banking crisis is clear. Judging by the way the markets are moving, there is no expectation of a serious economic slowdown, at least not yet. That viewpoint was given more credibility by Hatzius at Goldman Sachs. After the Silicon Valley Bank failure, he had raised the probability that the US economy will enter a recession in the next 12 months to 35%. Today he lowered it to 25%, citing the debt ceiling resolution, increased confidence the banking crisis would have only a modest impact on GDP growth, and stabilization in housing. Bottom line: Sell-side analysts are often derided for being slow to act, which is a fair accusation. However, in this case, their reticence to slash earnings estimates in expectation of an imminent recession or a banking crisis has proved to be correct.