What Does the Most Recent Earnings Season Tell Us What’s in Store for the Stock Market (SPY)? Steve Reitmeister, CEO of StockNews.com, takes a look at the latest earnings season results and highlights key points that some might find bullish…but most will find bearish. That is why he remains cautious about the market’s future prospects. Find out all this and more in this updated stock commentary below.
“At the end of the day, all price action results in profits.”
The above is a quote from Ben Zacks…the famous money manager at Zacks Investment Management that I worked for over twenty years ago.
Indeed this quote is 100% true. In particular, as it refers to expectations for future earnings. That’s why we’re going to dive into the latest earnings season to see what it tells us about the future of stock prices.
While the investment world was focused on inflation and the Fed a very interesting earnings season took place. The details of which tell us about recent price action and what might be next.
In short, I’d say it’s been a bad earnings season because earnings estimates keep falling lower for next year. However, expectations were so low that it created an easy hurdle to overcome giving some logic behind the early 2023 rally.
There is no shortage of data that one could analyze. However, I think the chart below is the best way to gauge how Wall Street feels about this earnings season.
Let me add some color comments to understand these trends.
What you see here is the change in forward earnings growth expectations for the S&P 500 in each quarter through 2023. It’s clear that things have been moving in the wrong direction for some time now, and they’ve gotten worse as earnings reports have come out in recent weeks . Most notably, the next 3 quarters show negative earnings growth when +10% earnings growth is the norm in bullish periods.
The more optimistic view is to say that Q1 earnings estimates have ONLY fallen from -6.29% to -8.62%. Because the average recession is accompanied by a 20% decline in earnings, we could say that modest revisions keep hopes alive for a soft landing. This will mean that the worst is behind us and a new bull market is emerging.
The more pessimistic view is to estimate that Wall Street is usually behind the curve at the start of a new recession. And, as such, estimates to decline by 20% or more may still be on the way. This negative outcome is certainly not priced into stocks right now and points to the potential for a much more severe fall in the future.
To sum it all up… the earnings outlook depends on the economic outlook… which is heavily dependent on the Fed.
On that front, Powell was decidedly more bullish after last Friday’s strong jobs report, which showed too much wage inflation. He was quite candid in his Economic Forum interview that this may lead the Fed to raise interest rates higher than previously expected… or for longer than expected.
This is in contrast to the bull run we experienced to start 2023. Which probably explains the haircut we took last week.
Let’s deal with this price for a moment.
The initial sell off from the recent high of 4,200 looked like your typical digest after consuming a lot of profits. However, on Friday we saw a very clear sector switch away from Risk On assets and back towards Risk Off.
The poster child for Risk On is Cathie Wood’s ARK Innovation Fund ( ARKK ), which was down -3.33% on the session even as the S&P closed in positive territory.
At the other end of the spectrum, we saw defensive Risk Off groups such as healthcare, utilities and consumer staples in strong positive territory on the day.
If this defensive rotation continues, then it means that more investors appreciate the false start of the 2023 rally and why there are still plenty of reasons to be bearish. This includes the earnings cut, as shared today, coupled with an increasingly hawkish Fed.
Key to price action in the near term is the ability to break out of the current 4,000 to 4,200 range for the S&P 500 (SPY). In particular, keeping in mind a break below 4,000 and just after the all-important 200-day moving average at 3,945.
A break below that would start a potential rally back to the downside. Let’s remember that 3,491 was the previous low. And the average market decline of 34% would see us retreat to 3,180.
Here are some upcoming events that could serve as catalysts for future price action:
2/14 Consumer Price Index
2/15 Retail Sales
2/16 Producer Price Index
Indeed, anything is possible when it comes to the economy and how investors react. However, given the facts, I still believe that the bear market extension is 2 times more likely than the emergence of a new bull market at this time.
What should I do next?
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I wish you a world of investment success!
Steve Reitmeister…but everyone calls me Reity (pronounced “Righty”)
CEO, StockNews.com and Editor, Reitmeister Total Return
Shares of SPY were trading at $408.01 a share on Friday afternoon, up $0.92 (+0.23%). Year-to-date, SPY has gained 6.69%, versus a % gain in the benchmark S&P 500 over the same period.
About the Author: Steve Reitmeister
Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the company, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, along with links to his latest articles and stock picks.
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