The S & P 500 broke above its 200-day moving average Wednesday for the first time since April and, perhaps more importantly, is on the verge of breaking a downtrend that’s been in place all year. The benchmark is now 14% above its 2022 closing low of 3,577, reached on Oct 12. Unfortunately, Wall Street strategists do not share the exuberance of investors. JPMorgan has become the latest to lower its 2023 earnings forecast. “Fundamentals will likely deteriorate as financial conditions continue to tighten and monetary policy turns even more restrictive … while the economy enters a mild recession with the labor market contracting and unemployment rate rising to ~5%,” JPMorgan said in a note to clients today. The bank slashed its 2023 earnings forecast almost 9%, to $205 from $225 (far below the analyst consensus of $231), “on weaker demand and pricing power, further margin compression, and lower buyback activity.” This is part of a disturbing trend in the last few weeks: strategists, who tend to look at the macro environment, are looking around at 2023 and do not like what they see. Analysts, who are mostly focused on individual companies and sectors and who tend to move much more slowly than strategists, are still relatively optimistic we can eke out small earnings gains in 2023. The gulf between the strategists is wide and getting wider. 2023 S & P 500 earnings: who’s right? Analyst consensus: $231 (up 4.9% YOY) Goldman Sachs: $224 Barclays: $207 JPMorgan: $205 BofA: $200 RBC: $199 With stock prices rising and earnings estimates declining, we are now witnessing a dangerous expansion in the 2023 multiple (P/E ratio). How wide? It depends on where you think estimates will land. $231 (current consensus): 17.6 P/E $220 (2022 est.) 18.5 $200 20.4 Just as a reminder, 17 times forward earnings is the historic average. At an optimistic valuation of $231, we are already that now. To justify multiples toward 20 for any length of time, investors must believe that the economy is expanding and earnings prospects are improving. But we are going in the opposite direction. That sets up for a dangerous showdown, as JPMorgan noted this morning. In the first half of 2023, “We expect [the] S & P 500 to re-test this year’s lows as the Fed overtightens into weaker fundamentals,” the strategists said in their note. Ultimately, that will force the Fed to pivot in the middle of the year: “This sell-off combined with disinflation, rising unemployment, and declining corporate sentiment should be enough for the Fed to start signaling a pivot, subsequently driving an asset recovery, and pushing [the] S & P 500 to 4,200 by year-end 2023.” “Upside and downside to our base case will largely depend on the depth and length of the recession and the speed of the Fed’s counter-response.”
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