Earnings Outlook Softens In The Face Of Economic Uncertainty
The only thing certain about the S&P 500 (NYSEARCA: SPY) is that its value is based on the expectation of future earnings. In that light, an increase in the expectations for earnings should lift the market and a decline should make it fall. Looking at the latest figures from Factset, the outlook for earnings took a turn for the worse over the past week and points to another downdraft in equity prices. Not only has the outlook for Q2 softened but the analysts are also trimming their expectations for Q3, Q4, and even 2023 and we don’t think this phenomenon is over. Based on our outlook for inflation, the Fed, and consumer spending, we think the downdraft in expectations has only begun and it will get stronger before it's played out.
Energy Is The Stand-Out Winner For Q2 2022
The outlook for Q2 earnings fell 20 basis points over the past week which isn’t much until you consider the outsized impact the energy market is having on the outlook. The Energy Sector (NYSEARCA: XLE) is expected to post triple-digit EPS gains versus last year and the consensus figures have only risen over the past 6 months.
As it is now, the Energy Sector is expected to grow earnings by 217% and the consensus estimate is up a full 8000 basis points since the start of the quarter. This is offsetting, but not completely, downtrending estimates for Tech, Healthcare, Staples, Communications, Discretionary, Utilities, and Financial stocks with the Discretionary names in the lead. The outlook for Consumer Discretionary stocks is down 2280 basis points since the start of the quarter and it is trending lower now.
The worst of the news is the analysts, who had been waiting until closer to the reporting season to trim estimates, are also cutting the outlook for Q3 and Q4 as well as next year. The consensus figures for both Q3 and Q4 are down 30 basis points in the last week despite offsetting increases to the Energy outlook and the really bad news is in regard to 2023. The outlook for 2023 is down 210 basis points in the last week and nearly 300 from the peak set just two months ago and it will move lower over the next two months.
The leading sector for 2023 is expected to be the Consumer Discretionary sector and it is the hardest hit by inflation and shifting consumer habits. The latest Retail Sales data shows the pace of spending is not only down but that price increases aren’t making up the difference. What this means is that, while margins may hold up, the volume of business is in decline and provides a very shaky foundation for earnings. In regard to margin, a full 50% of the S&P 500 reported a decline in margin for Q1, and that figure is expected to rise over the next 2-3 reporting periods.
The Technical Outlook: The S&P 500 Is Trending Lower
The S&P 500 hit a bottom in the final week of the 2nd half but we don’t think it is a buyable bottom. While there is some evidence the rebound could continue over the next week or so, there is no indication of a reversal and the trend is still down. The most recent signal that matters is the confirmation of resistance at the short-term 30-day EMA and the fall below support at 3,800. This signal confirms the downtrend and suggests a retest of the recent lows near 3,675 if not a lower low. If the 3,675 level is able to hold price action we see the index moving sideways at this level until the earnings reports and guidance indicate a rebound in sentiment. If 3,675 does not hold up as support we see this market moving down to the 3,400 level and possibly lower. The bottom line, it is too early to call a bottom in the stock market and there is every reason to think it will move lower because the earnings outlook is still deteriorating. 
