DataTrek Research took a look at Q3 earnings estimates for the S&P 500 (SP500)(NYSEARCA:SPY) of late and note that they fell to $49.11 per share for the week ended Sept. 17 from $49.30 for the week ended Sept. 3.
DataTrek co-founders Nicholas Colas and Jessica Rabe write that "while the net reduction may seem small (a cut of 0.4 percent over the last 2 weeks), it stands in stark contrast to a year’s worth of upward revisions."
With the economy not shrinking and Q3 not seasonally worse than Q2 during expansions, DataTrek asks why estimates are coming down.
"The simple answer is conservatism, both on the part of analysts and the companies they cover," they write. "The more complex one is margin compression due to factors like input cost inflation, higher labor costs, and logistics challenges in cyclical groups."
If "the Street is right and $49/share is the correct number for S&P 500 Q3 earnings, then US large caps are a raging short right here," they say. "There’s simply no way a market that trades for 20x 2022 estimates ($220/share, with 2021 at $201/share) is expecting Q3 results to be down 7 percent from Q2."
"Such an outcome would strongly imply that there’s no way we’ll get 10 percent earnings growth in 2022, after all."
While it was easier to be bullish as EPS revisions rose, "we must rely on the commonsense approach of sequential quarterly earnings comparisons and swim against the tide of Wall Street earnings revisions," they add.
DataTrek notes the sectors taking the brunt of the estimate cuts:
Industrials (NYSEARCA:XLI). XLI was "expected to show a +73.6 percent increase from Q3 2020 two weeks ago. Now that expected comp is +68.1 pct, lower by 5.5 percentage points."