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S&P 500 Q4 earnings estimated to drop year over year

Yahoo Finance's Jared Blikre breaks down S&P 500 fourth-quarter earnings estimates.

Video Transcript

RACHELLE AKUFFO: Well, as we've been discussing, earnings season is ramping up, though the road ahead for investors is looking a bit dim, as the S&P 500 is expected to report a year over year decline in earnings. That's according to a recent FactSet report. Well, here to shed some light at the start of this earnings season is Yahoo Finance's Jared Blikre. Jared, how's it looking?

JARED BLIKRE: Well, let's start with the good news here. This is Q4 earnings at a glance as of last Friday. We had some more earnings this morning-- Morgan Stanley, Goldman Sachs, but we're still early in the game here. And so some-- two key stats. For earnings reported, 79% have had profits better than expected. That's in terms of EPS earnings per share. 7.7%-- that is the amount by which earnings are exceeding those estimates.

But as you alluded to, Rachelle, we're looking at a drop in year over year estimates in EPS. That would be profits of 3.9%. When you get multiple quarters, at least two quarters of negative earnings growth or earnings decline, that is a technical profits recession. And that's in line with the technical definition of a recession in the general economy, where you have GDP going negative two quarters in a row, even though that's not the official definition of a recession. But for profits, this is something that's key to watch.

Now let me show you another chart. This is S&P 500 earnings growth. This shows this last quarter, the current fourth quarter of 2022. That is expected to be negative. That's that little, little drop below the white line right there. And you can see how that compares to this huge drop that we had around the pandemic. So nothing approaching that just yet.

And you take a look at the reaction after that. This was the result of the huge fiscal and monetary system stimulus that we had that really goosed those profits, those corporate profits. So what are we looking at right now? We've had-- we have a couple of different ways of looking at this. Mike Wilson over at Morgan Stanley who has been the most bearish and was really spot on in 2022, he's been calling for some-- he's had some major earnings call for this year. He's looking for operating margin to contract.

And this is all based on the fact that goods inflation-- that is CPI in the goods sector-- that is falling, but wages are sticky. So as long as companies have to pay workers more, and they're also able to charge less for their profits, that could theoretically continue to weigh on profits. So where we are right now, we're more in line with a 2015, 2016 earnings recession, where we saw the S&P 500 barely, just barely enter a bear market, down about 20%. We were already in a bear market before the Federal Reserve started tightening the screws last time. So this is quite a different situation.

I think what we're looking at here is things are either going to stay. We've already reached about the bottom that we're going to get and the upside. The pain trade is to the upside. Or, or we have a lot more downward revisions to go, and we are only at the beginning. So I don't know how much insight that provides you, but either things are about to get a lot better, or they're a lot to get a lot worse.

RACHELLE AKUFFO: Certainly keeping in mind we'll be hearing from the Fed at the end of the month as well, adding another wrinkle into things as well. Jared Blikre, thanks so much.