As Recession Looms, Earnings Forecasts Get Slashed
Analysts are lowering their forward earnings estimates at a rapid pace as fears of recession rise.


Third-quarter earnings season turned out to be about as ugly as Wall Street expected going in, but the news gets worse: Rising fears of recession have analysts cutting their forward earnings estimates at an unusually rapid pace.
That's bad, because as forward estimates come down amid recession worries, the broader market's valuation becomes less attractive.
For the record, third-quarter earnings season was forecast to be especially ugly. Increased labor costs, rising input prices, supply-chain disruptions, higher interest rates and a strong dollar were projected to clobber corporate profit margins and, by extension, earnings per share (EPS).

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Back in October, analysts forecast third-quarter earnings growth of just 2.4%, according to data from FactSet. That would have marked the lowest earnings growth rate reported by companies in the S&P 500 since the COVID-19-marred third quarter of 2020.
Cut to today, and with 99% of S&P 500 companies having reported results, the final numbers are all but in. Per FactSet, the blended earnings growth rate for the S&P 500 is 2.5%. If 2.5% turns out to be the actual growth rate for the quarter, it will mark the lowest earnings growth rate reported by the index since that infamous third quarter of 2020, when earnings tumbled 5.7%.
But it gets worse.
"Given continuing concerns in the market about a possible recession, are analysts lowering EPS estimates more than normal for S&P 500 companies for the fourth quarter?" asks FactSet Senior Earnings Analyst John Butters in his most recent report.
The answer is "yes," he says, and that means analysts believe recession (or at least fear of recession) is undermining current-quarter corporate profits.
Just look at what's happened in the first two months of this year's fourth quarter, Butters says. In October and November, analysts cut their S&P 500 Q4 EPS estimates by a larger margin than average. Indeed, analysts' fourth-quarter EPS estimate for the S&P 500 fell by 5.6% between Sept. 30 and Nov. 30.
To put that in context, this year's reduction in EPS estimates over the first two months of the fourth quarter was significantly larger than the Q4 average of the past five, 10, 15 and 20 years. Heck, it's the largest decline seen during the first two months of any quarter since the pandemic-scarred second quarter of 2020.
Q2 2020 also happens to be the last time the market was staring in the face of recession.
The bottom line is that a drop in forward estimates raises the forward price-earnings multiple (P/E) on the S&P 500. As of Dec. 2., the S&P 500 traded at 17.6 times analysts' 12-month EPS estimate, per FactSet. That's below the index's five-year average forward P/E 18.5, but higher than the 10-year average of 17.1.
Note well, however, that as of Sept. 30 – or before the slew of estimate cuts came in – the S&P 500 traded at a far more attractive forward P/E of 15.2.
Investors who find the market to be compellingly priced at current levels would do well to remember a couple of things: 1.) the S&P 500 will only look pricier at current levels if analysts keep reducing their estimates amid fears of recession; and 2.) valuation only tends to work its magic over the long haul, anyway.

Dan Burrows is Kiplinger's senior investing writer, having joined the august publication full time in 2016.
A long-time financial journalist, Dan is a veteran of SmartMoney, MarketWatch, CBS MoneyWatch, InvestorPlace and DailyFinance. He has written for The Wall Street Journal, Bloomberg, Consumer Reports, Senior Executive and Boston magazine, and his stories have appeared in the New York Daily News, the San Jose Mercury News and Investor's Business Daily, among other publications. As a senior writer at AOL's DailyFinance, Dan reported market news from the floor of the New York Stock Exchange and hosted a weekly video segment on equities.
Once upon a time – before his days as a financial reporter and assistant financial editor at legendary fashion trade paper Women's Wear Daily – Dan worked for Spy magazine, scribbled away at Time Inc. and contributed to Maxim magazine back when lad mags were a thing. He's also written for Esquire magazine's Dubious Achievements Awards.
In his current role at Kiplinger, Dan writes about equities, fixed income, currencies, commodities, funds, macroeconomics, demographics, real estate, cost of living indexes and more.
Dan holds a bachelor's degree from Oberlin College and a master's degree from Columbia University.
Disclosure: Dan does not trade stocks or other securities. Rather, he dollar-cost averages into cheap funds and index funds and holds them forever in tax-advantaged accounts.
-
-
Stock Market Today: Stocks Head South as Treasury Yields Hit New Highs
Expectations for another potential rate hike sent yields on both the 2-year and 10-year Treasury bonds to their highest levels in almost two decades.
By Karee Venema Published
-
Biden Cancels $37M in Student Loan Debt for Phoenix University Borrowers
Student loans for 1,200+ Phoenix University enrollees cancelled over misleading ad campaign.
By Joey Solitro Published
-
International Stocks: Time to Explore Investments Abroad
It's time for American investors to pack up their stay-at-home strategy and go shopping abroad for international stocks.
By Nellie S. Huang Published
-
Stock Market Today: Markets Up Again as Bank, Energy Stocks Outperform
The major indexes closed higher for a second straight day ahead of tomorrow's highly anticipated Fed decision.
By Karee Venema Published
-
Investors Nearing Retirement Show Patience With Markets
Despite last year’s upheaval, many investors are sticking with long-term plans and tightening their budgets instead of moving money out of stocks and bonds.
By Matthew Sommer, Ph.D. CFA® Published
-
Stock Market Today: Stocks Fall After First Republic Bank Suspends Dividend
The embattled lender's dividend cut was just the latest sign of instability in the banking industry.
By Karee Venema Published
-
Best Consumer Discretionary Stocks to Buy Now
Consumer discretionary stocks have been challenging places to invest in, but these picks could overcome several sector headwinds.
By Will Ashworth Published
-
Stock Market Today: Stocks Rally on Credit Suisse, First Republic Bank Rescue News
Reports that major U.S. banks would step in to help First Republic Bank helped stocks swing higher Thursday.
By Karee Venema Published
-
Stock Market Today: Stocks Struggle on Credit Suisse, First Republic Bank Concerns
Chaos in the financial sector stole the spotlight from this morning's inflation and retail sales updates.
By Karee Venema Published
-
What the Markets’ New Tailwinds Could Look Like in 2023
Historically, the markets bounce back nicely after sharp declines, so focusing on historically high-quality companies trading at today’s lower valuations could be a good recovery strategy.
By Don Calcagni, CFP® Published