Why Are Earnings Forecasts So Crucial Now?

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Stocks are all about earnings. We know that. 

But what’s going on with earnings right now? 

You may be hearing some whispers — from other publications or from us at TheStreet.com as we cover the market — that there’s a weird trend going on with earnings. 

Corporate earnings estimates for 2020 and 2021 have come down considerably. The Coronavirus has wiped out incomes and therefore revenues for business across most sectors. And companies still have to pay many fixed costs, so the profit they make per each dollar of revenue has shrunk, a double whammy to earnings. 

By April, 2020 earnings estimates had fallen by 20% from where they were in early January. And the rebound in 2021 will be to an earnings level lower than expected earlier. 

And the U.S. stock market is down about 15% for the year. This may seem almost appropriate, as stock prices are almost reflecting lowered 2020 earnings and lowered earnings beyond the year. 

But there are two sources of earnings estimates, one of which is said to be unreliable if you’re talking about where they were in March and April. 

Company-specific analysts, who model every last penny the company can bring in over 10-plus years, have their estimates. Those are the ones down about 20% for the year. Those company models take time, especially with economic and business factors changing seemingly by the minute. 

Macro investment strategists have their own estimates. Those people model out what they think stocks, bonds, real-estate, currencies and commodities will do, based on what the economy will do, to put it simply. They can’t trace every last dollar in the economy. They use macroeconomic and market indicators, coupled with historical trends and correlations, to model where earnings are likely to go. 

The strategists have basically said the analyst community has been slow to model in lowered company earnings. 

What does this mean for the market? Check out the quick video above. 

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