Stock prices are rising, but earnings are not: Here's what that means for the market

Published Mon, Nov 14 20228:01 AM ESTUpdated Mon, Nov 14 20229:38 AM EST

There is good news on several fronts, but the market has moved fast, and earnings forecasts are not cooperating. Lower-than-expected inflation from the CPI, China easing Covid restrictions and announcing a large rescue package for the real estate industry over the weekend, and the Russians retreating from the strategically important city of Kherson, Ukraine, are all good news for the market. The problem is that while the S & P 500 has been advancing, earnings have been declining. The S & P is up 11% since its October low, but earnings growth for the fourth quarter is now expected to be negative 0.1%. 2023 estimates are also coming down fast, shrinking from 7.8% growth expected on Oct. 1 to just 4.9%, expected on Monday. At this point, many strategists anticipate flat earnings for 2023. Since earnings estimates are unlikely to rise, the multiple (P/E ratio, what investors are willing to pay for a future stream of dividends and earnings) has to keep advancing for the market to advance. But the multiple is now starting to look very rich. After starting the year with a multiple of 21, then dropping to as low as 15 times at the end of October, the S & P is now trading for 17.2 times 2023 earnings, about the same as its 10-year average. To argue for a higher multiple is effectively to argue for a soft landing, still a tough call, even for the bulls. The bottom line: "Wall Street analysts are assuming corporate earnings remain stable over the next 6 months, and stock prices reflect the same fundamental optimism," Nicholas Colas from DataTrek said in a note to clients. What happened to earnings? It's complicated, but simply put, there has been a rerating of earnings expectations for large tech-oriented companies. For Q4, several large tech-oriented companies (Amazon, Intel, Meta) are reporting greatly reduced profits that are dragging the overall S & P profit outlook down. Remove them, and the overall earnings outlook greatly improves. At the same time, oil companies are gushing profits, and a few industrials — Boeing in particular — are expected to report earnings gains that are pushing the S & P profit outlook up. Remove these companies, and the overall outlook looks less promising. Here's how it breaks down. S & P 500: Q4 earnings estimates Q4: down 0.1% Ex-Amazon, Intel, Meta: up 3.9% Ex-Exxon, Boeing, Chevron: down 3.1%