Forget inflation, it’s all about earnings

New York
CNN
 — 

To everything there is a season and now is the time for earnings.

Over the past few weeks investors have been squarely focused on inflation and Fed policy, but now market reactions are getting bigger for earnings (especially the misses) and smaller for economic data.

What’s happening: “We expect earnings to take the center stage going forward,” wrote Bank of America strategists Savita Subramanian and Ohsung Kwon in a note on Friday. They noted that over the last three quarters, S&P 500 reactions to earnings beats and misses have soared higher and have now surpassed the one-day market reaction to both CPI inflation and Fed policy meeting decisions.

Companies that missed on both sales and earnings-per-share during the last quarter underperformed the S&P 500 by nearly six percentage points on average the next day, the largest reaction to earnings misses on record.

Shares of Disney sank 13.16% last November — their lowest level in more than two years — when they missed earnings estimates. Meta shares plummeted 24% after showing a drop in third-quarter revenue in October, the company’s second consecutive quarterly revenue decline. And shares of Palantir closed down more than 11% in November after it missed estimates only slightly.

“We see this as a narrative shift in the market from the Fed and inflation to earnings: reactions to earnings have been increasing, while reactions to inflation data and FOMC meetings have been getting smaller,” wrote Subramanian and Kwon.

So we can expect some serious volatility over the next few weeks as companies report their fourth quarter corporate earnings.

Bank of America’s predictive analytics team analyzed earnings transcripts to calculate sentiment scores and found that corporate sentiment remained flat in the third quarter, well off its highs, which points to a potential earnings decline ahead.

Similarly, companies’ references to of better business conditions (specific usage of the words “better” or “stronger” vs. “worse” or “weaker”) remained well below the historical average, and mentions of optimism dropped to the lowest level since the first quarter of 2020.

So far, swings have been to the downside. S&P 500 fourth-quarter earnings-per-share estimates have dropped by about 7% since October. Early earnings reports from some of the largest financial institutions point to a bleak quarter.

Bad news ahead: The estimated earnings decline for the S&P 500 in the fourth quarter of 2022 is -3.9%, according to a FactSet analysis. If that is indeed the actual drop, it will mark the first earnings decline reported by the index since the third quarter of 2020.

Over the past few weeks, reported FactSet, earnings expectations for the first and second quarters of 2023 switched from year-over-year growth to year-over-year declines.

The latest: JPMorgan beat estimates for fourth-quarter revenue but also increased the amount of money for…