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Earnings Estimates May Be The Next Shoe To Drop For Markets

By Michael KramerStock MarketsJul 01, 2022 04:13AM ET
www.investing.com/analysis/earnings-estimates-may-be-the-next-shoe-to-drop-for-markets-200626543
Earnings Estimates May Be The Next Shoe To Drop For Markets
By Michael Kramer   |  Jul 01, 2022 04:13AM ET
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This article was written exclusively for Investing.com

Earnings season may be about three weeks away, but earnings estimates are already starting to change. While the S&P 500 is down sharply this year, S&P 500 earnings are not.

But they are finally beginning to show signs of coming down. While this process started in the NASDAQ 100 and NASDAQ Composite weeks ago, it was a long wait before the S&P turned.  

These revisions could get more prominent as we get closer to earnings season, resulting in EPS estimates sliding more. Revisions down could be the next shoe to drop for the index. 

Estimates Are Now Rolling Over

This year so far, earnings estimates for the S&P have continually climbed, reaching a high of $228.54 per share on June 13, after starting the year around $220 per share.

While they have fallen off those highs, it has been less than 1%, dropping to just $227.86. Meanwhile, the S&P has slumped around 20%. It tells us a lot that all of the declines in the S&P 500, to this point, have been on multiple contractions.  

Of course, the S&P 500 now finds itself trading at 16.75 times 2022 forecast earnings, down from 22.7 at the start of the year and the high point. This poses another problem for the stock market, should earnings estimates begin to decline. Declining earnings estimates will push up P/E ratios if the index does not fall at the same pace as earnings. 

So, if earnings estimates start dropping, the S&P will need to slide with those earnings in order to maintain the current 16.7 P/E ratio. For the P/E ratio to fall to 14, the index would need to drop even faster than earnings estimates.

Increasing earnings estimates during H1 2022 have helped cushion some of the blow to the index. Declines could have been much worse. 


Energy Saving The Day

One reason S&P earnings have held up better than NASDAQ is the energy sector. Earning forecasts across the sector have soared, almost doubling. This is due to the soaring price of crude oil and other commodities like natural gas and gasoline.

But as the chart shows, earnings estimates for the energy sector have now started to flatten, and that could be because energy commodities have started to top out. If those commodity prices fall further, it could begin to push earnings estimates for the sector lower, pushing earnings estimates for the entire S&P 500 even lower. 

The two largest S&P energy companies are Chevron (NYSE:CVX) and Exxon (NYSE:XOM). Their earnings estimates have also stopped rising. Now it is possible that as earnings season nears, those estimates may start to be revised up.

But with oil prices starting to fall, they may also be revised lower. This means that Chevron and Exxon maybe two of the most important stocks to keep an eye on as earnings season approaches. 

XOM And CMP EPS
XOM And CMP EPS

it is worth noting that Chevron and Exxon's share prices have fallen dramatically in recent weeks. This could be an indication of what the market is thinking regarding their future earnings. 

If price leads earnings estimates, the second half of 2022 will see earnings estimates fall dramatically. 

Earnings Estimates May Be The Next Shoe To Drop For Markets
 

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Earnings Estimates May Be The Next Shoe To Drop For Markets

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Comments (10)
Ramesh Shah
Ramesh Shah Jul 03, 2022 1:20PM ET
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Indexes prices are manipulated at end qtrs, 30th Marc 2022 from 4,100cto 4, 600 and now 3,625 to 3,825. Sec sud look into this or maybe they look the other way to let Banks make money
Jeff Page
Jeff Page Jul 02, 2022 6:34PM ET
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Without oil, refining & E&P we'd be below $200. Thanks for bringing that up.
Billy Bilnaad
Billy Bilnaad Jul 01, 2022 12:32PM ET
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Again bad article from the biggest bear out there
Al Ose
Al Ose Jul 01, 2022 10:46AM ET
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Bill Wison of MS was pretty straightforward on Tv this morning. When talking about people who think earnings will hold up second half of year, he said “They are wrong.” So matter of fact it was funny
Tom Scurlock
Tom Scurlock Jul 01, 2022 10:34AM ET
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Dow - Down, S&P - Down, Nas - Down, “VIX - DOWN”!!!That tells you the manipulators plans are working…. FOR THEM!!!!
Jack Waters
Jack Waters Jul 01, 2022 8:55AM ET
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nothing is predictable short term any more because of irrational behavior of traders in the market. When we have these rallies in these bad times, Who IS BUYING .
Al Ose
Al Ose Jul 01, 2022 8:55AM ET
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Agree!!
Marco Jiménez
Marco Jiménez Jul 01, 2022 7:22AM ET
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Thanks Michael for sharing tour knowledge. Months ago you wrote an analysis indicating factores that May the market the become true. Good trades to you.
Steve Pate
Steve Pate Jul 01, 2022 6:15AM ET
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There's no maybe about it.
Trend Friend
Trend Friend Jul 01, 2022 6:15AM ET
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Lol
jason xx
jason xx Jul 01, 2022 5:19AM ET
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Can you do an article about how spx "could" drop to 1200?
jason xx
jason xx Jul 01, 2022 5:18AM ET
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The reason spx has dropped so much and earnings haven't is market is irrational and people overcome by fear of losing a dollar. The market is not the economy at all.
 
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