The sell-off could be headed for another leg down as too bullish analysts are forced to cut numbers

Published Mon, May 23 20228:37 AM EDT

Why aren't earnings estimates dropping? Mohamed el-Erian noted last week that the market was entering a new phase. "Initially this was a sell-off based on interest rate fears and based on financial conditions tightening. Today, it has all the elements of also being a growth scare," he said on our air. He is likely right. We are in a growth scare, which is translating into earnings worries. That is different than what we have been seeing so far this year. The stock market has been declining because investors are taking down the multiple (P/E ratio). The multiple is what investors are willing to pay for a forward stream of earnings and dividends. According to Refinitiv, the S & P 500 forward (12-month) multiple has declined from about 22 at the start of this year to 16.4 today. That is below the 5-year average (18.6) and below the 10-year average (16.9). El-Erian's comment implies there could be another leg down based on concerns about growth and earnings, but the analyst community doesn't seem to have gotten the memo. Estimates for the S & P 500 increased last week, according to Refinitiv. 2022 Earnings estimates Today: $228.84 5/6 $227.50 2023 Earnings estimates Today: $251.52 5/6 $250.53 (Source: Refinitiv) While much of the increase was due to energy estimates going higher, much of the estimates for consumer staples, technology, and communications services remain unchanged over several weeks ago. The lone sector that is beginning to see estimate cuts is consumer discretionary. Why are analysts so slow to cut estimates, and does this mean another leg down is imminent? Nick Raich, who covers earnings at Earnings Scout, agreed that most of the upward revisions in the S & P as a whole is due to revisions in energy stocks, but says that does not explain away analysts in other sectors are not lowering their numbers. "The analysts in the other sectors are nuts," he told me. "They should be kitchen-sinking the numbers, taking them down, and they haven't done that." Why not? "Because they are acting like deer caught in the headlights, because companies still don't know exactly how inflation is going to influence their earnings for the rest of the year," said Raich. Without more explicit guidance, the analysts do little or nothing. It's not like there are too few analysts. Even though the sell-side community has been declining over the past 20 years, there's plenty of analysts out there, and plenty of estimates made. On average, there are about 20 earnings estimates provided for the 500 stocks in the S & P 500, which means roughly 10,000 earnings estimates are made each quarter. Since most analysts cover several stocks, the total number of analysts is much smaller, about 1,700 according to Refinitiv, which would work out to an average of about 6 companies per analyst. If El-Erian and many on Wall Street are right, those analysts are going to get a lot busier. For companies where analysts do nothing, companies reporting numbers may have to beat by a wider margin to get a move in their stocks, since the market is betting many estimates will be falling. With the S & P 500 on the verge of bear market territory, what should long-term investors be doing? Join us Monday on ETF Edge when our guest will be Gerard O'Reilly, co-CEO of Dimensional. Dimensional has $659 Billion in assets under management. They are not stock pickers, but they do seek to outperform the market by systematically pursing sources of higher expected returns they have uncovered by decades of rigorous academic evidence. We'll talk about the perils of market timing, understanding your risk profile, and how they are generating alpha for their clients. Also joining us is Dave Nadig, financial futurist at VettaFi's, the newly renamed company formerly known as ETF Trends.