Wall Street’s Outlook for S&P 500 Earnings Is Getting Gloomier

(Bloomberg) -- Stocks are extending a rally sparked by hopes of a slowdown in inflation, but equity analysts have only gotten more pessimistic about what’s to come for a key driver of returns. 

After cutting S&P 500 earnings estimates for nine straight weeks, analysts have finally priced in negative earnings growth for the final quarter of this year. According to Bloomberg Intelligence, analysts now project S&P 500 earnings to decline 0.39% year-over-year in the fourth quarter, down from August’s expectations of 6% growth.

Company fundamentals may have taken a back seat to macro issues this week, when a softer-than-expected inflation report sent the S&P 500 on its best one-day surge in over two years. But that may not be cause for bulls to celebrate, as rising prices were a key driver of earnings beats for many companies this year, according to Dennis DeBusschere, founder of 22V Research. 

Read more: Wall Street Is Missing the Risk to Stocks If Inflation Is Beaten

“As inflation peaks, companies where earnings were supported by rapid margin expansion are potentially at risk. The sharp increase in mark ups from companies (inflation) was a significant portion of earnings beats this year,” he said. “Even the lowest quality and lowest pricing power companies were able to pass on costs.” 

Although the current earnings cycle fared largely better than expected, several strategists worry that earnings will get a lot worse and reflect the economic outlook.

“Q4 earnings are going to be disastrous. But I think maybe that’s going to be the bottom. Maybe then we will start to see things slowly turning around as we go into 2023,” Fiona Cincotta, senior financial markets analyst at City Index, said in a phone interview. 

--With assistance from .

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