Why Are Wall Street Analysts as Pessimistic as Ever?

With the start of a corporate earnings season this week, the stock market will face its next big test. Analysts’ concerns over inflation and the economy’s health are expected to dominate the policy debate.

According to FactSet, analysts anticipate S&P 500 firms to report their first year-over-year quarterly earnings decline since the Covid-19 pandemic in 2020. Fourth-quarter earnings are anticipated to have declined by 4.1%. This is a dramatic reversal from the over 31% growth recorded a year previously.

Persistent rising costs, increasing interest rates, and a once-in-a-generation rise in the dollar have all been roadblocks for corporations. Investors hope to use this next set of reports for wisdom into the sustainability of corporate profits and future stock prospects. Analysts, on the other hand, have been trimming their earnings expectations.

The Core Uncertainties of Equity Investors

In the year 2022, the S&P 500 dropped 19%. However, it commenced in the year 2023 on a brighter note. Inflation increased 1.4 percent this week, defying Friday’s jobs report, which indicated slower-than-expected wage growth.

This week, investors will examine the quarterly outcomes of some of the country’s biggest banks. These include companies like Delta Air Lines Inc., JPMorgan Chase & Co., Bank of America Corp., UnitedHealth Group, and UnitedHealthcare. They will all report this week. The recent consumer-price statistic will also influence the Federal Reserve’s effort to boost interest rates.

How long consumers can continue to swallow rising costs when businesses seek to pass on higher expenses is a critical question for investors. According to the Commerce Department’s most recent statistics, consumer spending slowed in November before the crucial holiday shopping season. To attract budget-conscious customers, retailers offered substantial seasonal discounts.

Earnings reports are mixed in recent weeks. Nike Inc., for example, raised its sales prediction in December as it addressed its inventory problems.

More on Analysts’ Expectations

According to FactSet, analysts anticipate energy firms to report the greatest year-over-year profit growth among the S&P 500 sectors in the fourth quarter, at 63%. According to the experts, materials and discretionary categories are to suffer the most profit erosion.

On the other hand, some investors said that the sharp drop in consensus estimates prepared them for worse results. According to FactSet, analysts reduced their earnings projections in the fourth quarter by 6.5%. This is a far steeper decline than the norm. As a result, it makes it easier for investors to buy shares when companies have a lower hurdle to clear.

Even so, earnings projections for 2023 remain optimistic. According to several investors, this might lead to more Wall Street changes in the future. According to FactSet, analysts anticipate S&P 500 corporations will report 4.7% growth in profits this year, roughly in line with expectations for 2022.