I noted last week that following a strong first quarter (S & P up over 7%), the S & P 500 almost invariably is up even more by the end of the year. The strategists have not gotten that memo. For the most part, the strategist community is fairly gloomy going into first quarter earnings season and the prospects for further gains in 2023. “For the first time in many years, our enthusiasm for stock market performance potential this year is relatively tempered,” the usually bullish Brian Belski at BMO Capital said in a note to clients Tuesday morning. “While our 4,300 2023 year-end S & P 500 price target still implies decent upside from current price levels, we believe it will be difficult for stocks to finish this year anywhere near the all-time highs set in early January 2022.” Same with Chris Harvey at Wells Fargo. He too noted that the S & P 500 is now “within spitting distance” of his year-end price target of 4,200 and announced Tuesday he was shifting direction. “[We] believe the risk/reward over the next six months is skewed to the downside. Over the next 3-6 months, we expect to see a 10% correction, with the SPX trading down to 3700.” It’s even worse when the subject of earnings comes up. It’s not just the first quarter that is getting pummeled. Strategists are openly belittling estimates for the second half of the year, which currently are stronger than the first half. Indeed, it looks like a race to the bottom to see who can claim the mantle of “lowest estimate on the Street” for full-year 2023 earnings. “EPS assumptions remain too high for 2023, in our view, and valuation is unclear given the inflation backdrop,” Tony Dwyer at Canaccord Genuity said Tuesday morning. “If we do indeed go into recession later this year, our below consensus S & P 500 Operating EPS estimate of $210/share [Street consensus is $219] should prove overly optimistic. We expect consensus to adjust lower as we get corporate guidance over coming weeks.” You can see why there is skepticism. At the very best, analysts are expecting earnings to be flat this year, and the only way even that is achieved is by making very rosy assumptions about the second half of the year. 2023 earnings: the trough is Q1 Q1: $50.63 Q2: $54.13 Q3: $56.84 Q4: $58.32 Source: Refinitiv That works out to $219.83, just a tad above the $218.09 that 2022 printed. Still, what’s most obvious is the second half of the year is full of optimistic assumptions. Both the third ($56.84) and fourth ($58.32) quarter prints would be historic records. Those prints, particularly the fourth quarter’s, seem largely based on the idea that earnings will recover after a modest economic downturn. There is the “soft landing” in earnings terms. “It seems excessively optimistic to think that earnings can make record highs in the back half of the year,” the always-astute Nicholas Colas at DataTrek noted Tuesday. Colas thinks $210 for 2023 is more realistic than the current $219 analyst estimate, and indeed that is where most strategists are clustered: in the $200-$210 range. That’s not even close to the low estimate on the Street (there are some at $190). Even at $210, Colas seems like he is conceding a bit of optimism. “Holding at current levels feels achievable, however, as long as there is no significant shock to the system this year.”
