Earnings Estimates Will Disappoint As Fed Tightens Policy

Earnings estimates are more deviated from long-term growth trends than at any point in history. As a result, analysts and Wall Street are overly optimistic as the Fed tightens monetary policy against a potentially disinflationary environment.

Analysts, by their very nature, are always overly optimistic. Such is why we play the “beat Wall Street estimates” game every quarter as Wall Street lowers estimates until there is a high “beat” rate by companies.

“The biggest problem with Wall Street, both today and in the past, is the consistent disregard of the possibilities for unexpected, random events. In a 2010 study, by the McKinsey Group, they found that analysts have been persistently overly optimistic for 25 years. During the 25-year time frame, Wall Street analysts pegged earnings growth at 10-12% a year when in reality earnings grew at 6% which, as we have discussed in the past, is the growth rate of the economy.

This is why using forward earnings estimates as a valuation metric is so incredibly flawed – as the estimates are always overly optimistic roughly 33% on average.”The Problem With Wall Street Forecasts

Once again, analysts have become exceedingly optimistic in their estimates.

Estimates Are Extremely Optimistic

Despite economic growth weakening as inflation increases, liquidity reducing, and profit margins under pressure, analysts continue increasing their earnings estimates. Currently, estimates for the Q4-2022 are $219.87/share according to S&P, up from $207/share at the end of 2021. As shown, that level will exceed the historical 6% exponential growth trend, which contained earnings growth since 1950, by the most significant deviation ever.

Earnings Estimates, Earnings Estimates Will Disappoint As Fed Tightens Policy

The only two previous periods with similar deviations are the “Financial Crisis” and the “Dot.com” bubble.

Earnings Estimates, Earnings Estimates Will Disappoint As Fed Tightens Policy

With analysts extremely exuberant, there seems to be little concern for investors. However, I would caution against such complacency. As shown, reversions are historically very swift.