S&P 500 earnings estimates for 2023 take 'complete U-turn' as recession risks loom, according to BofA

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Estimates for S&P 500 earnings per share, or EPS, in the fourth quarter are down 4.3% since the beginning of October, or 2.5 times the typical estimate cut “at this point in earnings season,” BofA equity and quant strategists said in a research note.

The S&P 500 risks another leg down after a “complete U-turn” in 2023 earnings-per-share estimates for the U.S. stock-market index, according to a BofA Global Research note.

The above chart shows how 2023 EPS revisions stack up against the historical average, while also considering exclusions of the COVID-19 crisis and 2008 global financial crisis. Analysts at Goldman Sachs Group said in a research note Friday that they lowered their 2023 EPS growth forecast to 0%, from a previously expected increase of 3%, after the S&P 500’s net margins contracted in the third quarter for the first time since the pandemic on a year-over year basis. They wrote that “weak” third-quarter margins presage “a headwind” next year.

Their forecast for a 9% earnings drop in 2023 should translate into an increase in the equity risk premium of 100 basis points, according to the note. And that size increase translates into an S&P 500 price of around 3,200 based on today’s rates, they said, pointing to a 1.7% real yield for the 10-year Treasury note.

 

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