Investor alert: Is an earnings recession brewing?

Investor alert: Is an earnings recession brewing?

What does the latest earnings season tell us about what lies ahead for the stock market (SPY)? Steve Reitmeister, CEO of, dives into the latest earnings season results and highlights key points that some might find bullish…but most will find bearish. This is why he remains cautious about the future prospects of the market. Find out all that and more in this updated stock commentary below.

“At the end of the day, all price action comes down to earnings.”

The above is a quote from Ben Zacks…the famous fund manager at Zacks Investment Management that I worked for over twenty years ago.

Indeed, this quote is 100% true. Especially when it comes to expectations about future earnings. That’s why we’re going to dive into the latest earnings season to see what it tells us about the future of stock prices.

Market Commentary

As the investment world focused on inflation and the Fed, a very interesting earnings season unfolded. The details tell us about recent price action and what might be in store.

In short, I’d say it’s been a bad earnings season as earnings estimates continue to drop for the year ahead. However, expectations were so low that they created an easily overcome hurdle, giving some logic behind the early 2023 rally.

There is no shortage of data that could be analyzed. However, I think the following chart is the best way to gauge how Wall Street feels about this earnings season.

Let me add some color comments to make sense of these trends.

What you see here is the change in future earnings growth expectations for the S&P 500 every quarter for 2023. Clearly, things have been moving in the wrong direction for some time and have only gotten worse as that earnings reports have been released in the last few weeks. Most notable is how the next 3 quarters show negative earnings growth when +10% earnings growth is the norm in bullish times.

The most optimistic view is to say that earnings estimates for the first quarter ONLY slipped from -6.29% to -8.62%. Given that the average recession is accompanied by a 20% drop in earnings, one could argue that the modest revisions keep hopes of a soft landing alive. This would mean that the worst is behind us and that a new bull market is emerging.

The most pessimistic view is to appreciate that Wall Street usually lags the curve at the onset of a new recession. And so reduced estimates of 20% or more could still be in the works. This negative result is certainly not priced into stocks at this time and indicates the potential for a much more serious downside to come.

In summary…the earnings outlook depends on the economic outlook…which very much depends on the Fed.

On that front, Powell was decidedly more hawkish after last Friday’s strong jobs report showed far too much wage inflation. He was pretty candid in his Economic Forum interview that this could lead to the Fed raising rates higher than expected…or longer than expected.

This goes against the uptrend experienced at the start of 2023. Which probably explains the haircut we took last week.

Let’s take a look at this price action for a moment.

The initial sell off from a recent high of 4,200 felt like your typical digestion after gobbling up a lot of gains. However, on Friday we saw a very clear sector rotation away from Risk On assets and back towards Risk Off.

Risk On’s flagship is Cathie Wood’s ARK Innovation Fund (ARKK) which fell -3.33% on the session even when the S&P closed in positive territory.

At the other end of the spectrum, we saw no-risk defensive groups like healthcare, utilities and consumer staples were STRONGLY in positive territory on the day.

If this defensive rotation continues, it means more investors appreciate the false start to the 2023 rally and why there are still plenty of reasons to be bearish. This includes declining earnings as shared today coupled with an increasingly hawkish Fed.

The key to price action in the near future is the possibility of breaking out of the current range of 4000-4200 for the S&P 500 (TO SPY). In particular, keeping in mind a break below 4000 and just past the all-important 200-day moving average at 3945.

A break below that would likely trigger a rush to the bearish side. Recall that 3,491 was the previous low. And the average bear market decline of 34% would take us back to 3,180.

Here are some upcoming events that could serve as catalysts for future price action:

2/14 Consumer Price Index

2/15 Retail Sales

2/16 Producer Price Index

Indeed, anything is possible when it comes to the economy and investor reaction. But given the facts at hand, I still believe that the extension of the bear market is 2 times more likely than the emergence of a new bull market at this time.

Trade accordingly.

What to do next?

Check out my brand new presentation: “Stock trading plan for 2023which will help you assess the complete bullish versus bearish case to create the right trading strategy. It covers essential topics such as…

  • Why 2023 is a “Jekyll & Hyde” year for stocks
  • How the bear market could come back with a vengeance
  • 9 trades to profit now
  • 2 trades with 100%+ upside potential as a new bull emerges
  • And much more!

Show “Stock trading plan for 2023” Now >

I wish you a world of investment success!

Steve Reitmeister…but everyone calls me Reity (pronounced “Righty”)
CEO, and Publisher, Reitmeister Total Return

SPY shares were trading at $408.01 per share on Friday afternoon, up $0.92 (+0.23%). Year-to-date, SPY has gained 6.69%, versus a % rise in the benchmark S&P 500 over the same period.

About the Author: Steve Reitmeister

Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the company, but he also shares his 40 years of investment experience in the Reitmeister Total Return Portfolio. Learn more about Reity’s background, plus links to his most recent articles and stock picks.


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