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Market May Not Rise Much More as Earnings Estimates Fall

Published 11/11/2022, 04:22 AM
Updated 09/20/2023, 06:34 AM

Earnings season for the third quarter was better than expected for the S&P 500, with earnings and revenue both surprising to the upside. However, it is what comes next that is likely to weigh on markets going forward, as 2023 earnings estimates are falling rapidly for both the Nasdaq and the S&P.

As earnings forecasts slide, P/E multiples are likely due to rise, especially if the prices remain at current levels. As of now, neither the S&P nor Nasdaq is cheap, but not expensive either. Instead, they appear fairly valued. But that means there is a cap to how much the market can rise, given that declining earnings are likely to push that PE multiple higher.

Falling Earnings Estimates

Earnings for the S&P 500 have dropped to about $236.77 per share from a peak of about $249.31 per share. Meanwhile, the Nasdaq 100 is expected to earn $581.91 per share in 2023, down from $643.21 per share in February. It is a sharp decline, with most of that significant decline coming in October alone.

That has resulted in the S&P 500 P/E ratio moving up to around 16.4 and the Nasdaq 100 ratio climbing to approximately 19.5.

Both PE ratios are well below the market peak but still at the upper end of their historical range which becomes problematic if earnings estimates continue to fall.



A Range Bound Market

An overvalued market limits the amount stocks can increase in the long run. For example, the S&P 500 trading at 17 times next year's earnings seems reasonable, but that would cap the S&P 500 value to around 4,000.

However, as earnings continue to fall, which they should as the economy continues to slow due to tightening monetary policy, the value at which the S&P 500 hits 17 times next year's earnings also falls. Therefore valuations will likely keep a lid on markets, especially given investors' expectations.

This may be a critical issue because, barring a pivot by the US Federal Reserve, at best, this market may be range bound between a P/E of 14 to 17, which has been the range for years—suggesting an S&P 500 that trades between roughly 3,300 and 4,000 until there is some form of resolution.

Either the Fed needs to shift its course of trying to restrict monetary policy, or there needs to be evidence that a recession is unlikely so that earnings estimates can either stop falling or reverse higher. Outside of that, a sustainable rally in the market will be capped by rising valuations and falling earnings estimates.

Disclaimer: This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer's views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer's analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer's statements, guidance, and opinions are subject to change without notice.

Latest comments

The stock market is based on the CRIME of the ILLEGAL and UNLAWFUL dollar according to Article 1, Section 10 of the US Constitution. Go ahead, invest in crime.
Easy long too easy thank kramer you r the best keep it up
Thanks for your advice could you tell me should short Monday?
Thanks after your post I hold my long tight and easy wong again told you guys already this is the best i dictator of making descion
All those praising this poor Kramer guy, IF you would have followed his advice back at the bottom when we said stocks will make new lows, you account would be down to ZERO right now. think about that and stop following this b. ozo blindly.
he has been right, you're a huge (mo)(r)(on)
you are probably talking about Jim Cramer and are a little bit confused
Excellent article.
LOL
I love how you conveniently leave out how wrong your cpi call was.
Ten upvotes and no replies??? Have one.
even Cleveland Fed had indicated they expected CPI to come in hotter than expected.   its possible the numbers were scrubbed and there will be a revision later or increase in next CPI report.
he acknowledged it last article
all USA people invest in india
no
Go fix your toilets first
what if drastic layoff by tech companies such as twitter…will mass layoff offset fall in estimated earning ? and how about impact of the war between russia and the west on market? esp if nuke is used…
The west should not fear the threat of a nuclear attack. Accepting that threat is like negotiating with terrorists. We should go strong on that war and end it.
Hane you aleready feeling the warm of your burning portfolio?
It's true that we have been range bound over the past 6 months
Thanks for your views, Michael!!! The mechanical bull has find a RATIONALE, the FED PIVOT, that is possible, but no sure. In the mean time, a lateral is the most likely. The problem is that if the FED pivot before time, sticky inflation will rise, and then FED will be obliged to tigthen even more agressively. Greetings you all!!
if the fed is raising by only 50bps, and that may happen in December, that is not a "fed pivot".  Fed pivot is when the fed reduces rates.  and that will not happen for some time,  maybe late 2023.
 I agree with you. Market narrative is FED pivot, reality seems that pivot it will take for much longer. Greetings!!!
Fed pívot as mentioned won't happen in a few years
What about Shiller PE of stocks... will it not fall because Fed is causing deflation?
7.7% inflation is not deflation
Lol I will file this analysis next to your last one. In the toilet, pre dump.
he makes a fair point for valuations or don't fundamentals matter anymore earnings estimates are falling and the economy is evidently slowing. we can't this keep wishing for new highs just because stocks were there before
he's done pretty well.  maybe missed in saying CPI would come in hotter than expected and therefore yesterday's rally but many thought that.
evidently slowing? LOL you've drank the algos Kool Aid
Much more confident to hold my long since his last post thanks kramer you always help me to make descion
he's saying it can rally further just it your long will hit headwinds about the time SP500 hits 4200.  Then Q4 earnings will be in the spot light and likely not great.  Its similar to Wilson at MS.
Hmmm... no mention of yesterday's article, nor the market action.
Thanks for the article 💯
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