The earnings apocalypse has not yet materialized

Traders on the NYSE floor, October 12, 2022.

Source: New York SE

The first crop of earnings reports was a disappointment, but most of Friday’s early bank reports were decent, and Bank of America also reported better-than-expected earnings on Monday morning.

So far, 35 companies have reported their third-quarter results. 68.5% of this group beat estimates, which is below the previous four-quarter average of 78.1% but above the historical average of 66.2%, according to Refinitiv.

As in the second quarter, many were anticipating an earnings apocalypse — a dramatic collapse in earnings.

The evidence so far points to a contraction, but not a collapse.

The estimated earnings growth rate for the third quarter of the S&P 500 is now 3.6%, up from 11.1% on July 1st. Excluding energy, however, the growth rate drops to minus 3.1%.

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Those huge oil gains have masked the fact that nine out of 11 S&P sectors have already seen earnings downgrades. The technology sector has seen a significant downward revision from up 5.8% on July 1 to down 4.0% today.

There were similar downward revisions in the fourth quarter as well. Technology, for example, is up 0.4% now from an expected 8.6% gain on July 1st.

The coming week: Winning season begins

Conclusion on earnings: The market has already priced in a much lower multiple (P/E) and anticipates a slowdown in the economy. Everyone is now expecting earnings to be cut for the fourth quarter and that will be the impetus for another market decline.

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The pain trade (the trade that would produce the biggest surprise in the market) would be for the gains to come in close to expectations, which could lead to the same rally we saw off the June lows when another was expected Profit apocalypse failed to materialize.

If you’re looking for signs of a bottom, you won’t find it in the technical indicators. Techs were full of somber comments over the weekend.

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“Since this summer’s bear market rally ended in mid-August, the supply-demand balance has deteriorated significantly,” Lowry, the nation’s oldest technical analysis service, wrote to clients over the weekend.

No kidding: previous rallies (there have been several in May, June, July, September and October) have met little buying enthusiasm (strong volume).

“Historically, such patterns are indicative of a stock market vulnerable to further medium-term downside,” Lowry wrote.

A basic indicator of momentum, the Advance Decline line, fell to a fresh bear market low last week.

“This reinforces the fragile state of the market and points to further downside for stocks as breadth often leads price,” Lowry wrote.

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