Analyst downgrades are coming

US earnings season is under way, with JPMorgan, Morgan Stanley and PepsiCo among the companies to report this week. Given the dire economic mood, one might think analysts have been slashing estimates, but that’s not the case.

Even during good times, estimates tend to be reduced coming into a quarter, allowing companies to beat lowballed estimates. According to FactSet’s John Butters, analysts have lowered quarterly estimates by a smaller margin than average over the past three months. Not only that, full-year estimates have been increased, while 2023 estimates are largely unchanged.

FactSet data also shows analysts are maintaining an “unusually high” number of buy ratings. On average, analysts forecast the S&P 500 will increase by some 30 per cent over the next year.

Globally, too, analysts have been oddly calm. There have been as many earnings upgrades as downgrades, notes Société Générale’s Andrew Lapthorne, who says estimates are “way too optimistic” if a slowdown is coming. Morgan Stanley’s Lisa Shallett is similarly sceptical, saying analysts are “sitting there like deer in headlights, not knowing what to do with numbers”.

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Reduced estimates are a case of when, not if. The real question is whether markets will respond badly to downgrades or whether they will shrug them off.

US chipmaker Micron recently projected revenues would fall way short of expectations, but the stock price remained stable. Is this an isolated case, or are inevitable analyst downgrades already priced in? We shall see in coming weeks.