Source: Man Solutions, Professor Robert Shiller - Yale University, as of September 2018. Figure 2: As Earnings Go, So Goes the Market Source: IBES, Man Solutions, 20 January 2019. Figure 1: Breadth of Earnings Revisions for the S&P 500 Index As such, we pay more than a little regard for indicators such as breadth of earnings revisions, which can give an early signal. However, the relationship has been fairly coincident. Over the past 150 years, the market has tracked the absolute level of earnings very closely (Figure 2). We note a pronounced narrowing of revisions breadth before each of the last three recessions (Figure 1). Given that breadth is narrowing to this extent, it seems fair to say that not only is pessimism increasing in the absolute sense, but its momentum is also becoming more entrenched. Indeed, since the peak of the market in September 2018, we have seen the 2019 integer fall almost 6% to $168 and the 2020 figure decline 5% to $186. Think of it as the chart above, but zoomed out.The breadth of earnings revisions вЂ“ calculated as: number of analyst estimate upgrades less number of downgrades / total number of estimates вЂ“ for the S&P 500 Index has fallen from an all-time high of 22% in March 2018 to -6% as of 20 January, 2019.1 Unsurprisingly, the aggregate revisions number has also been moving down. During the past 15 years (60 quarters), the average decline in the bottom-up EPS estimate during the first two months of a quarter has been 3.5%.Д«rian Belski, chief investment strategist at BMO Capital Markets, charted this in a research note published on Thursday. During the past 10 years (40 quarters), the average decline in the bottom-up EPS estimate during the first two months of a quarter has been 2.7%. During the past five years (20 quarters), the average decline in the bottom-up EPS estimate during the first two months of a quarter has been 2.0%. In a typical quarter, analysts usually reduce earnings estimates during the first two months of a quarter. John Butters, the analyst who wrote the FactSet report, makes very clear that while this recent 1.2% negative revision represents the largest decrease in earnings estimates since Q2 2020, the size of the decrease is actually smaller than historical averages. вЂќ The missing context tells a different story You can read about it in FactSetвЂ™s March 4 report titled: вЂњ Largest Decrease In EPS Estimates For S&P 500 Companies Since Q2 2020. This is a potential вЂњgame-changer,вЂќ eroding their conviction on the prospects of risk assets, they wrote.ДЇor U.S.-focused investors, the narrative is essentially the same. ) From BloombergвЂ™s story:Д¬iti strategists led by Jamie Fahy said a global gauge tracking analyst estimates on corporate profits has turned negative for the first time since September 2020. The chart above comes from Citi (reproduced by Bloomberg. Over the past few weeks, some have noticed that analysts have been revising down their expectations for corporate earnings.

Earnings estimate revisions