S&P 500 earnings beats aren’t the make-or-break factor for stocks

The big issue for S&P 500 earnings in the third quarter hasn’t exactly snuck up on investors. The stock market has been struggling since September and the reason can be summed up in an index that is currently trading at a price-to-earnings ratio above its long-term average as many external factors, including rising commodity prices, wage inflation, general inflation, supply chain chaos, and interest rate policy become headwinds for stocks.

It was in the FedEx earnings which came out long before the major corporate earnings season started, with the shipper missing estimates by a lot, and that was after analysts had already taken estimates down in the runup to its earnings report. Making too much of any single earnings bellwether isn’t a good way to think about the S&P 500, especially as it is now dominated by tech, but the fact that analysts didn’t take FedEx earnings estimates down enough is notable for setting the tone for how companies come into earnings, and how different it may be this time around compared to all the other quarters since the Covid bottom.

In the runup to Q2 earnings, growth estimates were rising for the S&P 500. That has not been the case this time, with growth estimates continuing to fall in the weeks ahead of the major earnings that began Wednesday with J.P. Morgan. Prior to the recent negative earnings revisions, there had been nothing but increasing estimates over the last 12 months. That’s one of the reasons investors don’t need to struggle to understand why stocks have struggled since September. Stocks wavered on Wednesday as the latest inflation numbers, and the first big earnings of the week, came in, and after three straight days of losses.

“It was much easier to be bullish on U.S. stocks when analysts were raising estimates virtually every week, as they did up until September,” DataTrek Research noted in a recent report.

And that hasn’t changed this month. Sam Stovall, chief investment strategist at CFRA Research, says usually EPS estimates have begun to outpace the end-of-quarter estimate this early in the reporting cycle, but that’s not happening as major corporate earnings begin, with the S&P 500 continuing its trend of negative revisions, off by 1.7 percentage points through Oct. 11 versus Sept. 30. He cited higher-than-expected oil prices which Delta Air Lines commented on Wednesday, inflation, interest rates, and a continual lowering of Q3 GDP forecasts. Global growth continues to be downgraded as well.

According to Stovall, this may end up being only the second quarter out of the last 49 in which actual results were lower than end-of-quarter estimates.

“You invest in stocks because you want a piece of the action, and the action is earnings and dividends, and if action comes down in terms of earnings…