Need to Know: The market is too optimistic about corporate earnings for 2023. Here’s why.


After several attempts this month the S&P 500

has finally managed to close above the 4,000 level. Happy Thanksgiving! Bulls will now want to see that barrier become support and will be eyeing the next hurdle, the 200-day moving average, currently around 4,062.

But for the market to extend its rally into next year, at least one of two things will probably need to happen. Corporate earnings will have to rise or the multiple applied to earnings will have to increase. The latter may occur if investors become more optimistic, say, in anticipation of a Fed pivot.

However, anyone hoping for earnings growth even managing to be flat for 2023 “is very naïve”, according to Peter Ganry, head of equity strategy at Saxo Bank.

Ganry notes that the 12-month forward earnings per share estimate on the S&P 500 is currently at $235.34 which is 7% above the expected full-year 2022 EPS of $219.38. That’s too high, he reckons.

“There is nothing unusual in this divergence conflicting with reality as sell-side analysts have a natural long bias…and are slow to react and incorporate new information. The fact that the 12-month forward EPS estimate on S&P 500 is only 4% from its recent peak despite the ongoing margin compression says it all.”

And indeed it is over-optimism on corporate margins that may trip up investors. It’s important. As the chart below shows looking over a short time period such as one year, the changes in earnings are strongly associated with changes in the operating margin.

Source: Saxo Bank.

“If you take EPS of $220 next year and divide with the expected revenue per share of around $1,800 which fits pretty well with a 1-year lag in US nominal GDP growth, then you get a net profit margin of 12.2% which exactly where the 12-month trailing net profit margin stood at in September,” Ganry says.

That implies that S&P 500 companies can maintain their net profit margin next year. That’s “a completely detached assumption” for several reasons.

First, companies have been constantly talking about margin pressures in their Q3 earnings reports, particularly regarding wage pressures and also commodities and energy costs. Indeed, the growth of wages – typically the biggest cost for many companies – in the U.S. and Europe is running at its fastest pace in many decades.

“High wage growth is difficult to offset in an inflationary environment when recent price hikes by companies have now reached a point where they are destructive for volume growth (Home Depot being a recent example of this),” Ganry notes.

Next: “The operating and net profit margin are both coming off historically high levels and margins are a mean reverting process, so this alone indicates that margins will trend down from current levels,”

 Ganry adds: “The fact that the Q3 net profit margin in S&P 500 is 11.9% (below the 12-month trailing figure) and trending lower suggests that margins are coming down faster than expected”.

Source: Saxo Bank.

Another downside risk to earnings per share in 2023 is that revenue growth could be lower than current estimates as nominal GDP growth is coming down to 6.7% annualised in Q3, down from the average 12.2% annualised in 2021.

Finally, the move higher in interest rates as the Fed continues to fight inflation will force up corporate financing costs. “Not by much because only 20% of the outstanding debt is getting refinanced over the next 12 months, but it will still subtract from operating income before we reach EPS impacting the net profit margin.”

“If we are right about our operating margin call for 2023 then the impact on S&P 500 will vary depending on the equity risk premium (P/E ratio), revenue growth and the actual net profit margin,” says Ganry. The S&P 500 is sensitive to these variables.


Markets are going into the holiday break on a subdued note. S&P 500 futures

are slightly, with benchmark 10-year Treasury yields

barely changed at 3.754%. Oil

is again under pressure , however, as worries about soft China demand as Beijing implements more COVID-19 lockdowns.

For more market updates plus actionable trade ideas for stocks, options and crypto, subscribe to MarketDiem by Investor’s Business Daily.

The buzz

Credit Suisse stock

slumped 5% to hover near record lows after the embattled Swiss bank delivered the latest in a long line of miserable trading updates.

Shares in Apple

are a fraction softer in premarket trading as news emerges that workers at China’s biggest iPhone factory were beaten and detained.

A surprise quarterly loss revealed after the closing bell on Wednesday, has hit Nordstrom shares
down nearly 10%.

With markets shut on Thursday for Thanksgiving and everyone apparently going shopping on Friday, it seems all the week’s economic data has been crammed into Wednesday. So, taking a deep breath…here goes….

At 8:30 a.m. Eastern we have the weekly initial jobless claims alongside October durable goods orders. At 9:45 a.m. come the November S&P flash U.S. manufacturing PMI and services PMI. Then at 10 a.m. the October new home sales report is delivered at the same time as the November University of Michigan consumer sentiment index and 5-year inflation expectations. Finally, at 2 p.m. the minutes of the Federal Reserve’s recent rate-setting meeting will be published.

Ronaldo’s out and now the Glazers may be departing Manchester United too. The U.S owners of the English Premier League football giants, who also own the Tampa Bay Buccaneers, say they are exploring options which may include a sale of the club. United’s shares

jumped 15% late on Tuesday and are adding another 11% in Wednesday’s premarket action.

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The chart

Consider this from Bespoke Investment if you come back from Thanksgiving and fancy a spot of trading into the New Year.

“The S&P 500 has risen from the close on the Wednesday before Thanksgiving through the end of the year roughly three-quarters of the time with an average gain of 1.93%. When momentum has been dragging the index lower year to date, though, rest-of-year performance has been less positive. Again looking at years in which the index has fallen at least 10% headed into Thanksgiving week as is the case this year, positive returns through the end of the year have been less common only happening half the time with an average decline of 0.1%,” says Bespoke.

Source: Bespoke Investment.

Top tickers

Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.


Security name






AMC Entertainment




Bed Bath & Beyond



Cosmos Holdings


Mullen Automotive


AMC Entertainment preferred


Taiwan Semiconductor

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