The S&P 500 could be at risk for the biggest drop in earnings since the Covid-19 pandemic hit stocks in 2020. First-quarter estimates have grown weaker in recent weeks even though the index has rebounded from its December lows. Higher prices combined with lower guidance intensify divergences in bearish valuation. This is a dangerous combination.
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According to FactSet, S&P’s first-quarter 2023 earnings are set to drop by the sharpest since the pandemic while dovish companies issue the worst guidance since 2019. It now looks like the tech sector will issue the harshest warnings but all eyes will be on the financials after recent bank outbursts.
Sadly, 54% of S&P 500 constituents cut their earnings guidance for 2023, sending revenue forecasts down to their lowest levels since 2020.
The S&P 500 is overvalued as corporate expectations slow
This proportion rises to 73.5% in the first quarter. Of the 106 companies that submitted reports, 78 were guided by earnings that were lower than FactSet’s estimates. This is the highest number of companies with negative guidance since the third quarter of 2019, and the fourth highest number since FactSet began tracking in 2006.
The index’s 12-month price-to-earnings (P/E) ratio is 18.0, which is below the five-year average of 18.5, but slightly above the 10-year average of 17.3. However, that level is higher than the 16.7 recorded at the end of the fourth quarter, reflecting a 7% increase in the price of the S&P 500 even as the forward 12-month EPS estimate fell during the first quarter.
Analyst reviews indicate lower views despite a higher multiplier
FactSet analysts expect the S&P 500’s earnings to fall 6.8% in the first quarter. That would be the biggest decline since the second quarter in 2020, when earnings fell 31.8%. Profit projections fell from $467 billion at the end of 2022 to $436.9 billion at the end of the first quarter.
FactSet analysts cut revenue estimates for the Mighty 500, from 3.4% at the end of the year to 1.8% on April 6.
Materials, information technology and manufacturing outnumbered other sectors with lower ratings. Financials remain murky, with few companies offering guidance. In their defense, these stocks rarely gave forward direction.
| Standard & Poor’s sector | Corporation first quarter earnings. December (in billions) | Corporation first quarter earnings. April (in billions) | % Inc./-Dec. | Q1 Price Inc. / December. |
|---|---|---|---|---|
| Material | 13.3 USD | $11.5 | -13 | +2.7% |
| energy | 43.2 | 43.2 | -9.5 | -1.3 |
| health care | 73.2 | 66.6 | -9.1 | -2 |
| industries | 35.9 | 32.8 | -8.8 | -0.4 |
| Consumer Dictionary | 29.6 | 27 | -8.6 | +12.3 |
| services | 13.9 | 14.2 | +1.8 | -1.8 |
Source: FactSet Report, April 6
Trend towards positive growth in the third quarter
For the second quarter, analysts expect earnings per share to show a decline of 4.6% after declining 6.8% in the first quarter. And they see a pivotal return to growth in the third and fourth quarters, at 2.1% and 9%, respectively.
So far, 19 companies in the S&P 500 have surprised investors on the positive side with first-quarter earnings though it’s down to 14 companies for positive revenue surprises.
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