Chart Of The Week   June 07 2022

On S&P 500 EPS Downgrades

equity downgrades

We recently highlighted that valuations have driven the year-to-date US equity selloff. Meanwhile, forward earnings estimates have been trending higher. Downward revisions would therefore constitute a risk to equity prices.

Overall S&P 500 12-month forward EPS estimates have been rising since the beginning of the year. However, analysts have started to revise down their forward earnings estimates at the sector-level for all but energy and materials – the two sectors benefitting from strong commodity prices.

Notably, the peak in earnings estimates across S&P 500 sectors occurred in mid-April – just as the Q1 earnings season gathered pace. Our US Equity strategists have highlighted that although the Q1 earnings results were fine, the ratio of negative to positive guidance for the second quarter was roughly two to one. Therefore, even though continued upwards revisions to energy sector earnings are bolstering overall S&P 500 EPS estimates, analysts are not as optimistic about prospects for the other sectors.

Nevertheless, the recent equity rally has been broad-based, with all S&P 500 sectors posting gains since May 20. The durability of this rally likely hinges on (1) the risk-free rate and (2) whether the macroeconomic environment calls for further downwards revisions to earnings estimates. On the former, we expect stable or declining Treasury yields to provide a tailwind to equity multiples over the remainder of the year. On the second point, we expect fortified household balance sheets to act as a buffer for consumers that will help offset negative forces on corporate earnings.