Earnings season expectations will sound another recession signal

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Earnings season is less than 30 days away, and it could be a big one as investors figure out just how deep a recession we’re in.

Every quarter, companies report their results, with the first data appearing approximately 15 days after the end of the previous quarter.

Most companies issue reports within 60 days of the end of the quarter.

There’s a certain skill to earnings season.

How earnings season affects stocks

Analysts develop earnings estimates.

Companies want to exceed these expectations.

When a company hits, the stock price often moves higher.

This is typical of sales to meet a loss of profit.

You might think that analysts want to get the best possible valuation.

They do, but the best estimate may be low.

When estimates are too high, management teams get irritated with analysts and limit their access to information.

Nobody on Wall Street wants that, so valuations are almost always too low.

In a typical quarter, about three-quarters of companies beat expectations.

As we head into earnings season, estimates may still be too high.

A sharp drop in income rings the bell of recession

The chart below shows the valuations of companies in the S&P 500.

They are all indexed out of 100 so we can see the trend in revisions.

Analysts were optimistic about June.

It was then that companies began to announce drastic cuts.

Reported earnings were 15% below the highest estimates for the second quarter ended in June.

Since then, analysts have lowered expectations for the current quarter by 6%.

The chart shows that this trend will continue until the end of the year and into 2023.

When a recession hits, incomes can plummet.

During the 2020 recession, revenues fell by 22%.

This was a special circumstance because the fall was due to the pandemic.

During the 2008 recession, revenues fell by 57%. This is another special circumstance caused by the global financial crisis.

In 2000, during the recession, revenues fell by 32%. A weak economy and Federal Reserve policies have caused this.

No matter what recession we’re looking at, there’s always a sharp drop in income.

Result: Expect it this time too.

Neither analysts nor investors are ready for this yet.


Michael Carris the editor True Options Masters, One Trade, Accuracy of profit andMarket leaders. He teaches technical analysis and quantitative technical analysis at the New York Institute of Finance. Follow him on Twitter@MichaelCarrGuru.

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