Despite the significant economic, monetary policy and geo-political induced volatility in equity markets in the first half of 2022, consensus EPS growth forecasts have been remarkably resilient. Is this reassuring or is it highlighting the risk that an EPS downgrading cycle is yet to commence?
Glass half full-rock steady EPS forecasts
Chart 1 shows the status of regional market consensus EPS growth forecasts for this year and next and measures the revisions (deltas) to the forecasts made at the end of last year. US growth forecasts have hardly changed over the last six months.
Chart 1: Regional consensus EPS growth forecasts
Source: Refinitiv, FactSet
The US 2022 and 2023EPS trails emphasize the steadiness in the forecasts over the last few months - showing no impact (so far) from the uncertainty and volatility of the market.
Chart 2: US Estimate trails
Source: Refinitiv, FactSet
Glass half empty –top-down headwinds yet to impact
The resilience in consensus forecasts could be providing a false sense of security. One of the key areas of concern is that analysts have a poor track record in predicting macro driven falls in EPS.
Chart 3 compares consensus12M forward EPS forecasts with trailing (reported EPS), and the forward estimates tend to follow (not lead) reported EPS down. Are analysts waiting for guidance and reported data to decline before they start reducing their forecasts?
Chart 3: Comparing US consensus EPS forecasts to reported (lagging) EPS
Source: Refinitiv, FactSet
The significant rise in input prices (both labor costs and materials) creates top-down headwinds for corporate margins. Some find it hard to reconcile these headwinds with unchanged EPS estimates.
Chart 4: US labor costs and input prices
Source: Refinitiv, FactSet
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