Traders on the NYSE floor, October 12, 2022.
Source: NYSE
The first round of earnings reports was a disappointment, but most of the early bank statements on Friday were pretty good, and Bank of America also earnings report above expectations Monday morning.
Thirty-five companies have reported third-quarter earnings so far. Of that group, 68.5% beat estimates, below the previous four-quarter average of 78.1% but above the historic average of 66.2%, according to Refinitiv.
Like the second quarter, many were predicting an earnings apocalypse – a massive drop in earnings.
The evidence so far suggests a contraction but not a collapse.
The S&P 500’s third-quarter estimated earnings growth rate is currently 3.6%, down from 11.1% on July 1. However, excluding energy, the growth rate dips to negative. -3.1%.
The huge oil profits hid that nine of the 11 S&P sectors saw earnings corrections. Technology has seen a significant downward correction – from a 5.8% gain on July 1 to minus 4.0% today.
There were also similar downward adjustments in the fourth quarter. For example, technology has gone from an expected gain of 8.6% on July 1 to minus 0.4% today.
Earnings bottom line: the market has priced in at a much lower multiple (P/E ratio), predicting economic depression. People are now predicting that earnings will fall in Q4 and that will be the impetus for another downward move in the market.
The painful trade (the one that caused the biggest surprise in the market) will be earnings that come close to expectations, which could trigger a rally like the one we saw after the June low, when another expected earnings apocalypse doesn’t happen.
If you are looking for signs of a bottom, you will not find it in technical indicators. Technicians were filled with bleak comments over the weekend.
Lowry, the nation’s oldest technical analysis service, wrote to clients over the weekend: “Since the end of the bear market rally in mid-August in mid-August, the balance of Supply and Demand have weakened significantly.
No kidding: the rallies to date (there have been some rallies in May, June, 7, September and October) have met with little buying enthusiasm (high volume).
“Historically, such patterns are indicative of a stock market that is susceptible to medium-term declines,” Lowry writes.
A simple indicator of momentum, the pre-decline line, fell to a new bear market low last week.
“This reinforces the fragility of the market and suggests further downside for stocks as breadth often drives prices,” Lowry wrote.
