Earnings estimates keep falling, which might be no problem for stocks

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Friday, January 20, 2023

Today’s newsletter is by Myles Udland, Head of News at Yahoo Finance. Follow him on Twitter @MylesUdland and on LinkedIn. Read this and more market news on the go with the Yahoo Finance App.

Corporate earnings season will be in full swing by the end of next week.

Big banks, airlines, and Netflix (NFLX) have all released results so far. And company-level results often surface compelling commentary on the state of consumers and the economy.

But Wall Street strategists looking at aggregate corporate profits for this quarter and the quarters ahead see one clear through line: Expectations are coming down.

Writing in a note to clients on Wednesday, FactSet’s John Butters noted earnings for S&P 500 companies are now expected to fall 3.9% during fourth-quarter earnings season. This would set up the benchmark index for its first aggregate drop in profits since the third quarter of 2020.

And the news doesn’t get much better looking further out.

“Looking ahead to the first quarter and beyond, what are analyst expectations for year-over-year earnings? Do analysts believe earnings declines will continue in 2023? The answer is yes,” Butters wrote. “Over the past few weeks, earnings expectations for the first quarter and the second quarter of 2023 switched from year-over-year growth to year-over-year declines.”

At first glance, a reduction in corporate profits — the ultimate long-term driver of stock prices — might seem like an obvious negative for the stock market this year.

A report from Jeffrey Buchbinder and the team at LPL Research released Thursday, however, suggests near-term earnings drops aren’t quite a death knell for current-year stock performance. In fact, quite the opposite.

“In years when earnings fall … stocks are actually more likely to rise than fall,” Buchbinder wrote. “This may be surprising to many of you, but when earnings fall, stocks are more than twice as likely to rise as they are to…

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