With inflation at decades-high levels and the war in Ukraine continuing to rage, stock analysts are nervously looking at earnings estimates for the next several quarters, and many do not like what they see. "We anticipate estimates to fall at increasing rates in the months ahead," Nick Raich, CEO at The Earnings Scout, said in a note to clients this week. The Federal Reserve may not be helping. It announced a likely series of rates hikes Wednesday into 2023 that were slightly more aggressive than many expected. The Fed has announced an intention to raise rates seven times in total this year, which would be a rate hike at every meeting, with the Fed funds rate ending at 2.8% in 2023. The central bank lowering its growth forecast is not helping either, Marc Chandler from Bannockburn Global Forex told me. "The Fed's growth forecast went from 4% to 2.8% for this year ... that will feel bad for businesses," he said. And that will affect earnings. "Discretionary consumption is going to get hit, the consumer is going to spend more money on food and energy," Chandler said. Put it all together, and it amounts to a difficult stew for earnings, which are coming off a record 2021. "Persistently high inflation, supply chain disruptions and now a tighter Fed will curb demand [and cause earnings estimates to come down]," Raich told me. Even before the Fed, earnings were coming down "Earnings growth rates have generally come down since the beginning of the year," Tajinder Dhillon, who tracks earnings estimates at Refinitiv, told me. Earnings for the S & P 500 in the first quarter were expected to grow 7.5% on Jan. 1, that is now down to 6.4%. Raich believes that relatively modest decline is masking the bigger changes that are about to come. He says the declines are modest so far because analysts are waiting for guidance from their companies. "Sell-side analysts cannot see the future and do not make estimates," he said. "Instead, they rely on company guidance to adjust their EPS forecasts." "With few companies reporting ... the volume of analyst EPS estimate revisions has been low," he added. That, Dhillon says, will change soon. The big winner in the earnings sweepstakes: Energy While most sectors are seeing declines in earnings estimates, the big winner in the earnings sweepstakes in the first quarter has been oil and gas companies. Far and away, energy has the biggest expected earnings growth. A combination of higher oil prices and increased demand is sending oceans of cash to oil and gas companies. Estimates for first quarter 2022 have gone from up 165% on Jan. 1 to up 213% today. Not surprisingly, the largest companies — ExxonMobil, Chevron, ConocoPhillips and Occidental Petroleum are contributing the largest amount of the earnings increase. Most of the gain will be due to higher commodity costs, as oil companies have repeatedly said they will be "disciplined" in increasing production. One other subsector is also looking strong: airlines. This week, United Airlines, Delta and Southwest have all made positive comments around improved spring bookings . However, most are still losing money. Most other sectors have seen earnings estimates come down Most sectors still have positive earnings estimates year over year, but they are coming down. For example, industrials estimates have slipped from a 55% increase on Jan. 1 to a 36% bump-up today. That is likely due to higher costs, a pull forward in demand, or concern about the impact of the Ukraine crisis on growth prospects in Europe, Refinitiv's Dhillon told me. 3M, Caterpillar, Stanley Black & Decker all have negative growth expectations year over year. Consumer staples estimates have declined from 5.2% to 1.2% growth; Walmart, Kimberly-Clark, and Kraft all have negative year-over-year growth expectations. Consumer discretionary had slim growth forecasts of 0.6%, but has now turned to a decline of 9.4%. Key stocks that have seen earnings estimates reduced include Amazon, Ford and General Motors. It's murky, but the trend is lower Put it all together, and the overall picture appears to be for lower earnings. "EPS growth will continue to decelerate over the next two quarters," Raich said in a recent note to clients. "For stock prices to justifiably go higher, 2Q22 & 3Q22 EPS estimates will need to hold steady. Our research indicates this is not likely." He is recommending that his clients stay underweight stocks. Others are arguing that one piece of the earnings puzzle — the worries over an economic slowdown, and worse, a recession — are being exaggerated. "The consumer balance sheet is in great shape ... we are still in a very sound footing," Gary Cohn, former director of the National Economic Council, said on CNBC's " Closing Bell " Wednesday, arguing that recession talk is way overblown. Others think that it could be farther out on the horizon. "I don't have a base case for a recession this year, but I do think we will probably get one in 2023," DoubleLine's Jeffrey Gundlach said Wednesday on CNBC's " Closing Bell: Overtime ." Cohn has an ally in Fed Chair Jerome Powell. At his press conference, Powell said the probability of a recession was "not particularly elevated" and emphasized the strong economy. After initially weakening, the markets seemed to take comfort in those assurances and ended higher for the day. FedEx Thursday night We may get an early guidance picture from FedEx, which reports after the bell Thursday. Investors are particularly interested on cost pressures the company has previously discussed. CNBC's Robert Hum notes that the shipper has talked about supply chain issues causing air cargo capacity limitations and recently announced related "peak surcharges" for many FedEx Express and freight shipments. "But how about the surging fuel costs? Any additional surcharges coming there?" Hum asked. "The company will probably also talk about the impact of suspending shipments into Russia.
A trader works on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., March 16, 2022.
Brendan McDermid | Reuters
With inflation at decades-high levels and the war in Ukraine continuing to rage, stock analysts are nervously looking at earnings estimates for the next several quarters, and many do not like what they see.