The Fed all that matters to analysts, ignoring the outlook

The earnings outlook for companies in the S&P 500 is quickly deteriorating — but analysts can’t raise their share price targets fast enough.

Consider it the stock market crash of 2023.

The two seemingly unrelated trends reflect how much stock prices are driven by speculation that the Federal Reserve is nearing the end of its most aggressive rate-hiking cycle in decades. That’s particularly favorable for growth valuations and technology stocks, which have held on to this week’s big gains even after disappointing earnings reports from Apple Inc., Alphabet Inc. and Inc.

But the extent to which analysts are raising stock price targets while slashing earnings forecasts is puzzling to those accustomed to seeing the market as dependent on the underlying strength of corporate America.

“Interest rates have come down and your discount rate has come down, so even though your profits aren’t going up, you can set a higher price [on the stock] just because of the lower discount rate,” said Krit Thomas, global market strategist at Touchstone Investments. “They’re saying, ‘Hey, we’re going to be out of this in six to 12 months, so let’s just review it.’

The fourth-quarter reporting season did little to support optimism about fundamentals. Earnings in sectors from energy to consumer discretionary came in short of seasonal forecasts, and companies cut forecasts on expectations that growth would slow. In fact, Bloomberg Intelligence’s model shows that such first-quarter earnings guidance has been cut by the most since at least 2010.

That forced analysts who had been sticking to rosier forecasts to follow suit. Among all the changes analysts made to their earnings estimates last month, only 37% were upgrades, data compiled by Citigroup Inc. showed. The level is associated with the last three economic recessions and is 30% below the historical average.

“To us, the analysts’ numbers for 2023 looked too aggressive,” Drew Pettit, director of ETF analysis and strategy at Citigroup, said in an email. They are “quickly revised to better suit economic reality.”

Considerable uncertainty remains about the direction of the economy, especially with Friday’s brisk job growth suggesting it is still expanding at a solid pace. Overall, however, economists generally expect growth to slow or even contract due to tighter financial conditions.

“We’re starting to see some of these companies come out and give less-than-ideal growth guidance,” said Brian Jankowski, senior investment analyst at Fort Pitt Capital Group. “We’re starting to see those business growth forecasts align better with GDP, which is projected to be very small or flat.”

That was largely offset in the stock market by speculation that interest rates were nearing cycle highs, a view that was bolstered by the Fed’s decision on Wednesday to slow the pace of its move. Sell-side analysts who cover S&P 500 companies — and are already bullish — responded by raising their estimates for the stock’s price at the fastest pace since spring 2021.

The Fed’s central role in the outlook for stock prices was underscored by how well the market performed this week amid some negative earnings surprises for major companies.

Apple reported a steeper fall in holiday sales than Wall Street expected, while Ford Motor Co. reported a missed profit amid continued supply shortages. Google parent Alphabet’s results signaled lower demand for its search advertising amid a slowing economy.

However, on Friday, the major stock indexes were little changed for most of the day before closing lower. However, the S&P 500 posted a second straight weekly gain.

Elsewhere in corporate earnings:


Shares in HDFC rose after the Indian lender posted 18% growth in personal loans in the third quarter, as lenders in India continue to benefit from growing credit demand. The company reported net income for the three months to December that met the average analyst estimate

Naver jumped after its e-commerce and content revenue beat estimates, though fourth-quarter total profit missed consensus


Intesa Sanpaolo shares fell even after the Italian lender reported fourth-quarter net income that beat analysts’ average estimate. The bank’s outlook was not clear enough to “excite the market”, according to KBW

Sanofi fell after the French pharmaceutical giant reported fourth-quarter results that missed estimates, which analysts attributed mainly to weak sales at its vaccines division. EPS growth guidance for 2023 could also disappoint and suggest an upside to consensus forecasts, Jeffries said


Apple shares turned higher as analysts noted that the company’s services business remains a strong area. Shares fell after the iPhone maker reported first-quarter revenue that fell short of expectations, hurt by macro headwinds and supply challenges

Ford shares tumbled after the automaker’s fourth-quarter profit missed estimates. The reaction among analysts was mostly negative, with some attributing the omission to company-specific issues. Meanwhile, Deutsche Bank cuts its sell recommendation on shares, seeing ‘significant operating deficits’

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