The Profit Apocalypse Hasn’t Happened Yet

Traders on the floor of the NYSE, October 12, 2022.

Source: NYSE

The first crop of earnings reports was a disappointment, but most early Friday bank reports were decent, and bank of America also reported profits above expectations on Monday morning.

Thirty-five companies have reported third quarter results so far. Of that group, 68.5% exceeded estimates, lower than the previous four-quarter average of 78.1%, but higher than the historical average of 66.2%, according to Refinitiv.

As in the second quarter, many have been anticipating a profit apocalypse – a dramatic collapse in earnings.

The evidence so far suggests a contraction, but not a collapse.

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

Those massive oil gains have obscured the fact that nine of the 11 S&P sectors have already seen earnings downturns. Technology has undergone a substantial downward revision – from 5.8% higher on July 1 to minus -4.0% today.

Similar downward revisions were also made in the fourth quarter. Technology, for example, has risen from an expected gain of 8.6% on July 1 to minus 0.4% now.

The Week Ahead: The Profit Season Starts

Bottom line on earnings: the market has already priced in a much lower multiple (P/E) in anticipation of a slowdown in the economy. Everyone now expects earnings for the fourth quarter to be cut, and that will be the impetus for another step in the market.

The pain trade (the trade that would cause the biggest surprise in the market) would be for gains to come close to expectations, which could trigger the same rally we saw after the June lows, when another expected earnings apocalypse failed to materialize.

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

“Since the end of this summer’s bear market rally in mid-August, the supply-demand balance has weakened significantly,” Lowry, the country’s oldest technical analysis service, wrote to customers over the weekend.

No kidding: rallies to date (there have been several, in May, June, July, September and October) have seen little buying enthusiasm (heavy volume).

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

A simple indicator of momentum, the forward decline line, fell to a new low in the bear market last week.

“This reinforces the fragile state of the market and suggests further disadvantage for equities, as width often leads to price,” Lowry wrote.

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