Are low expectations for US earnings low enough?

US earnings season got under way last week, with JPMorgan, Bank of America, Citigroup, Blackrock, and Delta Air Lines among the bigger names to report.

Expectations are low. FactSet data indicates S&P 500 quarterly earnings will slip 4.1 per cent, resulting in the first year-over-year earnings decline since the height of the pandemic in 2020. During the fourth quarter, analysts cut estimates by 6.5 per cent – roughly twice as much as the average decline in estimates over the past 10 years. Estimates fell in nine of the S&P 500′s 11 sectors.

Still, some warn expectations are not low enough when it comes to 2023. The consensus forecast is for earnings to rise 4 per cent this year, a forecast that looks decidedly optimistic to Morgan Stanley’s Lisa Shalett. She notes that profit margins remain near all-time highs and are well above pre-pandemic levels. Today’s earnings estimates “reflect neither a reversion to pre-pandemic trends nor an actual economic slowdown”, says Shalett.

Investors should “watch for excesses to be fully wrung out of estimates”. Perhaps, but will markets respond? Or have markets already priced in sharper cuts for 2023? We shall see in coming weeks.