Are US Earnings Estimates Bottoming?

Although the US equity markets have been rewarding for investors in 2023 with strong (but narrow) moves in the market averages, the underlying fundamental picture has deteriorated in terms of US companies’ profitability. Some of this has been obscured by a +29% move in the NASDAQ
NDAQ
driven by excitement over Artificial Intelligence (AI), which has benefited a group of mega-capitalization Technology stocks. More recently, performance has accelerated with the S&P 500 gaining over 13% year-to-date and the small stock Russell 2000 gaining 5%.

However, while inflation has fallen over the last twelve months from a rate of +1.2% on a month-to-month basis in June 2022 to +0.1% in May 2023, corporate earnings growth has also slowed. Consensus earnings estimates for the next three quarters (Q2-Q4 2023) have continued to come down over the past five months. It is worth noting that this also occurred in Q1 2023, but actual earnings easily outpaced those declining expectations. As seen on the chart below (Figure 1), year-over-year earnings for the S&P 500 are now expected to decline on an absolute basis before bouncing back in the fourth quarter. In addition, earnings expectations for the final three quarters of the year are all lower than they were in early March.