The S&P 500 dangers one other leg down after a “full U-turn” in 2023 earnings-per-share estimates for the U.S. stock-market index, in response to a BofA International Analysis observe.
“Ahead estimates have been minimize a lot bigger than standard,” BofA fairness and quant strategists mentioned in a analysis observe Monday. They mentioned that estimates for earnings per share, or EPS, for the S&P 500 in 2023 are down 3.6% for the reason that begin of October to $233 — 2.9 occasions the everyday minimize.
Whereas the 2023 EPS consensus stays “effectively above” BofA’s forecast of $200, estimates are 8% under the June peak of $252, in response to the observe. Revisions thus far this yr are “now trending in step with the historic common,” and if the two.9x tempo of cuts continues by way of year-end, the S&P 500 might see “no EPS development subsequent yr” as 2023 consensus would fall to round $220, the strategists warned.
BOFA GLOBAL RESEARCH NOTE DATED NOV. 7, 2022
The above chart reveals how 2023 EPS revisions stack up towards the historic common, whereas additionally contemplating exclusions of the COVID-19 disaster and 2008 international monetary disaster.
“Precise EPS traditionally got here in 4% under the place consensus stood at first of the yr, which additionally factors to potential for unfavorable development,” the strategists mentioned.
In the meantime, estimates for S&P 500 EPS within the fourth quarter are down 4.3% for the reason that starting of October, or 2.5 occasions the everyday estimate minimize “at this level in earnings season,” they wrote.
Analysts at Goldman Sachs Group mentioned in a analysis observe Friday that they lowered their 2023 EPS development forecast to 0%, from a beforehand anticipated improve of three%, after the S&P 500’s web margins contracted within the third quarter for the primary time for the reason that pandemic on a year-over yr foundation. They wrote that “weak” third-quarter margins presage “a headwind” subsequent yr.
Goldman stored its value goal for the S&P 500 at year-end at 3,600 and in addition maintained its 2023 forecast of 4,000.
Fairness danger premium
The BofA strategists mentioned of their observe Monday that they proceed to count on that “rising earnings danger will result in the next fairness danger premium.”
Their forecast for a 9% earnings drop in 2023 ought to translate into a rise within the fairness danger premium of 100 foundation factors, in response to the observe. And that measurement improve interprets into an S&P 500 value of round 3,200 based mostly on immediately’s charges, they mentioned, pointing to a 1.7% actual yield for the 10-year Treasury observe.
That valuation for the S&P 500 is under present buying and selling ranges, in addition to the index’s 2022 closing low of three,577.03 on Oct. 12, in response to Dow Jones Market Knowledge.
The S&P 500 has tumbled 20.9% this yr by way of Friday.
The U.S. inventory market was buying and selling largely larger early afternoon Monday, with the S&P 500
SPX,
+0.99%
rising 0.2%, in response to FactSet information, finally test. The Dow Jones Industrial Common
DJIA,
+1.39%,
a blue-chip gauge of shares, gained 0.7% in early afternoon commerce, whereas the technology-heavy Nasdaq Composite
COMP,
+0.90%
was about flat.
All three main inventory benchmarks fell final week amid investor nervousness over aggressive rate of interest hikes by the Federal Reserve because it battles excessive inflation.
The BofA strategists expressed concern over “looming recession danger” and falling company sentiment. “Mentions of weak demand have spiked to prior recession ranges,” they mentioned of their observe Monday.