Standard & Poor's in New York

mixed pattern

As we begin the final 6 weeks of 2022 next Monday, Nov. 21, we also look at the end of the October and November quarter for companies reporting in Dec ’22, but we don’t start to see most earnings reports of the fourth quarter ’22 through January 10-15 of 2023. We won’t really know Q4 ’22 earnings results for the most part until Walmart (wmt extension) reports mid-February ’23.

S&P 500 earnings are indeed a somewhat coincidental – lagging indicator.

S&P 500 data:

  • The 4-quarter S&P 500 earnings estimate (FFQE) fell to $224.81 this week from $225.20 last week (for a sequential drop of $0.39 or -0.17%), which is the smallest sequential drop in the last 4 weeks. No doubt Walmart has helped, but the trend is still a slow erosion as we move into late 2022;
  • This week’s P/E ratio closed at 17.6 times against 15.9 times on July 1st ’22;
  • The S&P 500 earnings yield was 5.67% compared to 5.64% last week and 6.31% on July 1;
  • Some are looking at the estimates from the bottom up: The bottom up estimate for Q2 22 ended at $55.92 today versus $55.90 last week. At least it’s over $55;
  • The FFQE held until 10/21/22: after that date, the forward estimate left the table. Here is the “4-week change” in the forward estimate from 10/21/22:
  • Week of 11/18: $224.81: 4-week change of ($7.81)
  • $11/11 Week: $225.20: 4-week change of ($7.82)
  • Week of 11/4: $226.72: 4-week change of ($7.67)
  • Week of 10/28: $229.54: 4-week change of ($0.89)
  • Week of 21/10: $232.61: 4-week change of $1.93

The catalyst for these sharp downward revisions were the earnings releases of mega-cap tech stocks that reported the last week of October ’22 and are now announcing layoffs.

This 4-week rate of change should start to ease as we move into late November and early December just because fewer S&P 500 companies are reporting.

Come ond EPS curve and rates of change:

S&P 500

Looking at the various rates of change on the spreadsheet above, negative revisions slowed down last week. The EPS data comes from Refinitiv’s IBES data, as the spreadsheets say, but all the calculations are mine, so anything that goes wrong is up to me.

S&P 500

These tables started being monitored in early 2022, just to keep an eye on the impact of quarterly earnings on full-year estimates.

It’s been a slow trickle down all year.

But note Consumer Discretionary and Communication Services. Consumer Discretionary expects a strong rebound in EPS growth in 2023. Communication Services currently looks like analysts are expecting a weak year next year as well.

Information technology or “tech” has lost about 87% of its 2022 forecasted annual growth since Jul 1 ’22, and in 2023 the tech sector’s projected growth is less than half of what was projected on July 1 ’22.

These 3 sectors account for approximately 43% – 44% of the market capitalization of the S&P 500 as of this weekend.

Summary/conclusion

There is little news in the S&P 500 EPS story, although Walmart was a pleasant surprise this week, while Target (TGT) was not. Retail is so brutally competitive, it’s hard to imagine a world where Walmart and Amazon (AMZN) don’t completely dominate retail, even if one is a consumer discretionary company, AMZN, and the other is a consumer base, WMT.

While neither stock is owned, this week I’ll be looking at Deere (DE) and Best Buy (BBY) in terms of interest in company reports. It’s Thanksgiving week, so it’ll probably be quiet after Tuesday.

There isn’t much to talk about on the earnings front of the S&P 500 as only pre-announcements or better-than-expected results will move the stock.

2022 has mostly been about P/E compression, but as the 10-year Treasury yield has stabilized, the concern now is that S&P 500 earnings will plummet.

As the above bulleted data shows, the forward estimate has been sharply reduced since late Oct ’22, but the market is so focused on inflation, the S&P 500 is higher and the P/E ratio is higher even with earnings weaker futures since then inflation has started to roll over.

So which part of the three-legged stool wins going forward? Weaker earnings, lower interest rates or the job market?

Weekly jobless claims, often overlooked but a very important metric because they are “frequent” and “current,” have softened a bit. The latest jobless claims number was for the last week of November jobs report measurement and hasn’t weakened much in the past three weeks, so don’t be surprised to see November jobs report expectations remain at over 250,000 – 275,000 jobs added. (This is a guess on my part.)

Maybe the Fed will get its soft landing.

More to come over the weekend. Please take all of this as an opinion with a healthy grain of salt. It’s an opinion, and data, like capital markets, can change rapidly. Past performance is no guarantee of future results and none of this data can be updated.

Thanks for reading.

Original post

Editor’s note: The summary points for this article were chosen by the editors of Seeking Alpha.

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