These companies are slashing earnings estimates, but the market may have sniffed that out already

Published Wed, Nov 1 20238:36 AM EDTUpdated Wed, Nov 1 20238:49 AM EDT

It's the trend in earnings that matters. Fourth-quarter estimates, which had been steady for some time, have seen a rapid decline in the past few weeks. The S & P 500 was expected to see an earnings gain of 11% for the fourth quarter on Oct. 1, and that expectation is now down to 7.8%. Stock prices run off future earnings and dividend expectations. It's the trend that matters: are earnings expectations for the next six months or so rising or falling? For most of this year, earnings have been flat to rising slightly. But that is now changing. "We're seeing larger estimate cuts than average for S & P 500 companies through the first month of the fourth quarter," John Butters at FactSet said. Nick Raich at Earnings Scout notes that of the 281 companies that have reported as of Tuesday, 60% have had their estimates cut for the fourth quarter, falling at an average rate of 2.2%. It's normal for estimates to be cut slightly in the first month of the quarter, but that is a much faster decline that in the previous three quarters. A small but significant group have seen substantial earnings cuts. Boeing, for example, was expecting to earn 27 cents per share for its fourth quarter on Sept. 27, but it is now expecting a loss of 66 cents per share. That's a huge decline in expectations (almost 300%) and very unusual for a large company. But Boeing isn't alone. Roughly 60 companies in the S & P 500 have disclosed declines of 10% or more in their earnings expectations in the month of October, according to LSEG. Earnings revisions: Notable declines in airlines and cruise lines Here are some of the S & P 500 companies that have seen earnings estimates decline 10% or more since the start of the fourth quarter, according to LSEG. Airlines and cruise lines have been hit particularly hard, but there is also a large sampling of companies in media/entertainment and automotive, and small but significant group in pharmaceuticals, energy, technology, food products and banks/capital markets. Companies with 10% or more earnings decline for Q4 estimates (from Oct. 1) Airlines/Cruise Lines American Airlines down 87% Norwegian Cruise Line down 87% Alaska Air Group down 84% Southwest Airlines down 46% United Airlines down 33% Carnival down 14% Delta down 13% Media/Entertainment Warner Bros Discovery down 91% Paramount Global down 36% Fox down 20% MGM Resorts down 10% Automotive Ford down 51% General Motors down 36% Tesla down 16% Pharmaceuticals Pfizer down 96% Merck down 71% Energy/Refiners Valero down 18% Marathon Petroleum down 16% Phillips 66 down 15% Technology Seagate down 548% Enphase down 38% Texas Instruments down 18% Food Products Kallanova down 19% Conagra down 14% Banks/Capital Markets Regions Financial down 16% Blackstone down 16% Goldman Sachs down 12% Morgan Stanley down 11% By contrast, the number of companies that have seen increases in their earnings estimates for the fourth quarter is fairly small. The group includes Intel and Amazon. The markets have sniffed this out: What's next The stock market, of course, does not wait for analysts to cut earnings estimates. Once rates started rising in mid-October, stock prices began dropping, but particularly for autos, airlines, energy, and pharmaceuticals — exactly those sectors with larger earnings cuts. Sector decliners (since Oct. 17) Autos (CARZ): down 8.5% Airlines (JETS): down 8% Energy (XLE): down 5.6% Pharmaceuticals (PJP): down 5% Banks (KBE): down 4% S & P 500: down 4% The bottom line: the stock market is a very efficient discounting mechanism for sniffing out earnings trends. The market is not always right, particularly longer-term, but it is brutally efficient. What's next? I noted Tuesday that the poor returns of the past three months — plus the strong seasonal showing that traditionally happens in November and December — is a positive setup for the end of the year, but the geopolitical picture very much muddies the outlook. "The market is pricing in so much bad news that you have to give the edge to the bulls," Alec Young, a chief investment strategist at MAPsignals, said. And the recession scare? That comes from the rate scare. "We have had a rate scare, but it's showing signs of cooling off, and the recession crowd has been wrong all year," he said.