A crystal ball on earnings is of little use

Whatever about what’s in store for 2023, strategists certainly didn’t envisage how painful 2022 would be for markets. The S&P 500 didn’t gain 8 per cent, as they predicted; it tanked.

However, strategists were “remarkably accurate” in one respect, notes Janus Henderson’s Aneet Chachra. Strategists estimated S&P 500 earnings of around $230 in 2022, up about 10 per cent. Currently, it’s estimated earnings will come in at around $222-$225, a gain of around 7-8 per cent. That’s close.

“Unfortunately, correctly predicting future earnings is less useful than one would think,” notes Chachra. A year ago, stocks traded on 23 times trailing earnings, compared to 18 today. This sharp drop in valuation multiples meant analysts’ price targets were completely off the mark, despite their accurate earnings forecasts.

This year was not exceptional in this regard. Yes, S&P 500 earnings and the index itself track each other over the long run, growing at an average pace of 8 per cent annually. On a one-year basis, however, the correlation between earnings and index movements is “almost zero”.

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Put another way, says Chachra, “even ‘knowing’ next year’s earnings growth in advance provides remarkably little insight into what next year’s stock price return will be”. Why? You can gauge earnings through good analysis, notes Chachra, but price targets are more sensitive to “sentiment and vibes”. Essentially, you’re trying to predict Mr Market’s mood in 12 months time. Good luck with that.