Earnings Revisions Versus Economic Surprise
Earnings Estimates Have Yet To Adjust To The Changing Trend In Economic Reports
Evidence continues to build to support our expectation of a slowing economy that will ultimately produce a collision between the rampant optimism reflected by markets and sobering reality, as the following chart illustrates.
The US Economic Surprise Index measures the frequency that economic reports exceed or fail to meet analyst estimates. For example, the strong stimulus-induced recovery from March 2020 beat estimates by a wide margin through year-end 2020. Since that time, the ability of economic reports to exceed expectations has declined swiftly, suggesting that the real economy is weaker than analysts believe. The chart illustrates that the Surprise Index has acted as a reliable leading indicator for S&P 500 earnings estimates.
Most noteworthy for investors is that analyst estimates for S&P earnings have yet to reflect the sharp decline by the Surprise Index. We expect a continuation of economic reports that reflect slowing growth which will eventually cause analysts to adjust their S&P earnings estimates lower. A decline in earnings estimates is one potential catalyst for the market volatility we anticipate for the second half of 2021.
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