…. we have clearly reached the “end of euphoria” phase.

Which is not to say that earnings as reported are terrible, on the contrary: 276 S&P 500 companies (71% of earnings) have reported so far, and consensus 1Q EPS has risen 4% since April 1 to $53.54, up 9% YoY, with all 11 sectors are beating consensus, and 56% beating on both sales and EPS vs. a typical 44% Week 3 rate.  

Underscoring what we reported last week, the two COVID demand reversals observed this quarter continue apace: first, a rapid shift from rate-sensitive big ticket items (housing & autos) to services (Exhibit 7), which will be a headwind for S&P earnings (50% goods vs. 20% goods for the economy). Second, Tech earnings are lagging. Its 2022 consensus earnings as % of S&P 500 earnings are now below are now below where it stood at the end of 2020, implying to full reversal of COVID-driven demand pull forward (Exhibit 8).

So far so good, but that’s as good as it gets. Because while consensus 2022 EPS rose 1% since April 1, it was entirely driven by Energy (and dropped -0.2% ex-Energy). Worse, when looking forward, both BofA’s guidance ratio (sliding to just 0.7x in April) and its earnings revision ratio (0.8x) have plummeted to the lowest since 2Q20, confirming the collapsing outlook trend we first noted one week ago.

It’s not just guidance that is imploding: according to Bofa’s Predictive Analytics team corporate sentiment sharply fell this quarter, representing the lowest level since 2Q20. Other than the COVID-impacted 1Q-2Q20, this marks the lowest level since 2Q16 when trailing 12-mo. EPS fell 2.7% peak-to-trough.

Worst of all, the sentiment score has also been highly predictive of the following quarter’s earnings growth YoY (54% r-sq), and points a sharp drop in earnings ahead. 

Adding insult to injury, companies’ mentions indicate a sharp drop in business conditions, with the spread between “better” or “strong” vs. “worse” or “weaker” falling to the lowest level since 2Q20.

Oblivious of this sharp reversal in corporate sentiment, analysts continue to expect S&P net margins (ex-Fins) reaching new highs by 2Q, which is at this point ridiculous and overly optimistic and sets the stage for sharp downside risks to consensus earnings.

Meanwhile, oblivious to reality, Wall Street consensus remains – as usual – too optimistic: as BofA notes, history shows analysts typically start the year too optimistic and cut estimates throughout the year. Since 2001, actual EPS came in 5% below where consensus stood at the beginning of the year on average (-1% excluding 2008 and 2020).

Consensus EPS for both 2022 and 2023 continued to climb higher YTD (+3% and 2%, respectively) driven by higher Energy earnings…

… but expect this to tumble once the weak guidance and slowing macro conditions finally make it clear to Wall Street that the euphoria is now officially over.

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Houses and Holes

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

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