The Future of Earnings: Is Pessimism the New Optimism?

The current state of earnings and margins reveals a few noteworthy trends. Trailing earnings, which refer to a company's earnings per share [EPS] for the most recent four quarters, have not shown any significant growth recently and are currently stagnant. Meanwhile, expected earnings, which represent analysts' predictions for a company's future earnings, are declining. This indicates that while companies may have performed well in the past, the future looks less promising.

Margins, which refer to a company's profit margin, are also worth considering. Although margins are decreasing, they are still at pre-COVID levels of 12%. This is likely due to the pandemic's impact on the economy and consumer behavior, leading to companies having to adjust their operations to maintain profitability.

Interestingly, some individuals view the current pessimistic outlook on earnings as a reason to be optimistic. This perspective suggests that negative earnings growth for the S&P 500, which is an index of 500 leading publicly traded companies in the United States, is actually an indication of a bullish trend. In addition, the U.S. beat rate, which refers to the percentage of companies that beat analysts' earnings expectations, is stable but with momentum reversing. This means that while companies are still meeting or exceeding earnings expectations, this trend may not continue.

However, not everyone agrees with this optimistic outlook. Some argue that earnings contractions cannot be deemed bullish, as there have been instances in which forward EPS growth fell to zero. This includes specific dates such as March 01, January 08, April 15, October 2019, and January 2023, which indicate that earnings growth can falter suddenly and significantly, leading to a decrease in stock prices.