Tuesday's Market Minute: Assessing 1Q Earnings Expectations

With the end of this quarter’s earnings behind us and bank earnings for the second quarter looming on the horizon, analysts are now weighing in. So far, analysts have trimmed earnings estimates by a larger margin than average in the first quarter as the banking crisis aids volatility and fear surrounding a looming recession.

Analysts lowered 1Q EPS estimates for S&P 500 companies by 6.3% to $50.75, which is a larger decrease than the 5, 10, 15, and 20-year averages according to FactSet. Materials, health care, information technology, and communication services are among the sectors with the largest predicted earnings-per-share declines. Analysts have lowered estimates by an average of 2.8% for quarterly earnings, and 3.8% over the past two decades. About 75% of all first quarter earnings guidance from S&P 500 companies has been negative, per FactSet.

The unexpected and urgent failures of Silicon Valley Bank and Signature Bank have sparked larger fears over liquidity, on top of still hot inflation and a weakening consumer. However, widespread earnings pessimism can’t be blamed entirely on the banks.

Individual sectors are grappling their own woes, with the material sector predicting earnings decline of about 36% on average. Analysts have reduced estimates for 79% of materials stocks, according to FactSet. Despite a strong 1Q, the semiconductor industry’s earnings are pricing in a 40% drop from a year ago, even with enthusiasm centered on generative AI and its future growth. 

One other notable shift is the 12-month P/E ratio for the S&P 500, which rose in the first quarter to 17.8 from 16.7, even as earnings estimates were revised lower, per S&P Global.

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