The S&P 500 index may be poised for the largest earnings decline since the Covid-19 pandemic pummeled stocks in 2020. First-quarter estimates have grown weaker in recent weeks though the index has rallied from December lows. Higher prices with lower guidance intensify bearish valuation divergences. This is a dangerous combination.
According to FactSet, Q1 2023 S&P earnings are set to fall the most since the pandemic while cautious companies issue the worst guidance since 2019. It now looks like the tech sector will post the most severe warnings but all eyes will be watching financials after recent bank blowups.
Ominously, 54% of S&P 500 components have now lowered their earnings guidance for 2023, dropping revenue forecasts to their lowest since 2020.
S&P 500 Overpriced As Corporate Outlook Dims
That percentage goes up to 73.5% in the first quarter. Out of 106 companies reporting, 78 have guided for lower earnings than FactSet estimates. That's the highest number of companies with negative guidance since the third quarter of 2019, and the fourth highest since FactSet started tracking in 2006.
The index's 12 month price-to-earnings ratio (P/E) is 18.0, lower than the five-year average of 18.5, but just above the 10-year average of 17.3. However, that level is higher than the 16.7 recorded at the end of the fourth quarter, reflecting the 7% increase in the S&P 500's price even as the 12-month forward EPS estimate fell during the first quarter.
Analyst Revisions Indicate Lower Views Despite Higher Multiple
FactSet analysts expect S&P 500 earnings to decline 6.8% for the first quarter. That would be the largest decline since the second quarter in 2020, when earnings declined 31.8%. The earnings outlook has toned down from $467 billion at the end of 2022, to $436.9 billion at the end of the first quarter.
FactSet analysts lowered revenue estimates for the mighty 500, from 3.4% at year's end to 1.8% on April 6.
Materials, information technology and industrials outnumbered other sectors posting lower estimates. The financials remain murky, with few companies offering guidance. In their defense, these stocks have rarely given forward guidance.
| S&P Sector | Q1 Earnings Est. Dec. (in billions) | Q1 Earnings Est. Apr. (in billion) | % Inc./-Dec. | Q1 Price Inc./Dec. |
|---|---|---|---|---|
| Materials | $13.3 | $11.5 | -13 | +2.7% |
| Energy | 43.2 | 43.2 | -9.5 | -1.3 |
| Health care | 73.2 | 66.6 | -9.1 | -2 |
| Industrials | 35.9 | 32.8 | -8.8 | -0.4 |
| Consumer Discretionary | 29.6 | 27 | -8.6 | +12.3 |
| Utilities | 13.9 | 14.2 | +1.8 | -1.8 |
Source: FactSet Report, April 6
Pivot to Positive Growth In Q3
For Q2, analysts expect earnings per share to show a 4.6% decline after the 6.8% decline for the first quarter. They see a pivot back to growth in Q3 and Q4, by 2.1% and 9% respectively.
So far 19 companies in the S&P 500 have surprised investors on the positive side for Q1 earnings though that drops to 14 companies for positive revenue surprise.
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