Sliding earnings forecasts

The METAR for this week is partly sunny. The mood of the market is mildly risk-on. The tentative upturn in the stock market will probably continue in a mild way, at least for the short term.

Whether stocks continue to rise depends largely upon the earnings of the companies.…

**Sliding Earnings Forecasts Pose Next Test for Markets**
**Analysts cut earnings growth estimates by most since second quarter of 2020**
**By Akane Otani, The Wall Street Journal, Sept. 12, 2022**

**Analysts have cut their estimates for third-quarter earnings growth by 5.5 percentage points since June 30, according to John Butters, senior earnings analyst at FactSet. That is more than usual and marks the biggest cut since the second quarter of 2020, when the Covid-19 pandemic and ensuing lockdowns brought economic activity to a standstill....**

**The S&P 500 trades at 17 times its next 12 months of expected earnings, according to FactSet. That is below its five-year average, but above where it was at the end of the second quarter, due to the fact that stock prices have risen while earnings estimates have fallen. “All things considered, it doesn’t really feel like a good time to be adding risk here,” Mr. Grecsek said.**

**So far, the decline in earnings estimates hasn’t been big enough to put companies on course for losses. S&P 500 companies are still expected to post earnings growth of 3.7% for the third quarter, according to FactSet. That would mark the slowest pace of growth since the third quarter of 2020....** [end quote]

The economy isn’t in a recession right now. Hiring is strong but hiring is a lagging indicator of recession. The question is whether a recession will arrive in the near future.

The Federal Reserve Bank of Atlanta’s GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2022 was 1.3 percent on September 9. That’s not recession, but it is very slow growth.

Treasury yields are rising at all maturities. The Treasury yield curve is partially inverted. If the Fed raises the fed funds rate to 3.5% by the end of 2022 or the start of 2023, as predicted, the yield curve will be fully inverted.

10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity curve is following the pattern (dipping to negative, then rising) that it has followed before every recession going back to 1976.

The Federal Reserve Bank of New York’s Corporate Bond Market Distress Index is elevated. Junk bond yields have risen to almost 15%. Many of the zombie companies rely on junk bonds. Rising bond yields will stress their balance sheets.

Although the S&P500 P/E ratio has declined it’s still high on a historic basis.

It will take several months to learn whether inflation is abating. The 5-Year, 5-Year Forward Inflation Expectation Rate is 2.33% so the bond market appears confident that it will in that time frame.

This doesn’t give a clear signal that stock prices will fall, but it also doesn’t give a clear signal that the worst is over. The Fed may yet thread the needle of controlling inflation without a recession, but the signs indicate economic weakness.