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Profit Forecasts Are Close to Hitting Bottom. Stocks Could Be Slow to Respond.

In February, about 40% of all earnings revisions for S&P 500 names were upward, according to Citi.

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Analysts have slashed profit forecasts for companies, and while the worst of the cuts may be over, the stock market may not immediately respond in kind. 

In the past year, the aggregate 2023 earnings per share analyst estimate for
S&P 500
companies has dropped just over 10%, according to FactSet. Much of the lowered expectations have been driven by the Federal Reserve’s interest rate increases, which are meant to cool inflation by reducing economic demand.

Now, it looks like earnings projections could stabilize soon enough. In February, about 40% of all analyst’s earnings revisions for S&P 500 names were upward, according to
That is still the minority, but it is an improvement over the 37% seen for January.

Overall, “earnings expectation resets may be further along than realized, largely pricing in an earnings recession,” wrote Scott Chronert, U.S. equity strategist at Citi. 

Another way of observing earnings trends confirms that the worst could be close to over. From June to the present, aggregate forward EPS estimates for the S&P 500 are down about 12%.

A historical average, excluding years when estimates were on the rise, shows that EPS estimates tend to decline about 14% from June through the end of the next year, according to RBC. The point is that, even if there is more downside from here, the declines are almost over, unless the Fed’s rate increases cause a severe—rather than mild—recession. 

The next question is whether such stabilization in earnings estimates can bring the stock market higher. 

That is going to take some time. The S&P 500 is already up just over 15% from a low point hit in early October, leaving the index much more expensive than it was months ago. Investors are anticipating that, as inflation slows and the Fed nears the end of rate hikes, the economy—and earnings forecasts—will stabilize and grow in 2024. 

The good news is that, while the market may have trouble rising for some time, it may also have bottomed already. The index tends to hit bottom three to six months before the bottom in the percent of EPS estimate revisions that are in the upward direction, according to RBC.

So for now, the market will monitor whether inflation keeps declining rapidly and if the Fed is truly finished lifting rates.

It should be fairly volatile for a few months, but be patient. Choppy waters will persist, but the picture could brighten from here, even if slowly. 

Write to Jacob Sonenshine at


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