Earnings season is less than 30 days away, and this could be a big one as investors figure out how bad of a recession we’re in.

Every quarter, companies report their results, with the first data coming out about 15 days after the previous quarter ends.

The majority of companies issue reports within 60 days of the end of the quarter.

There is some gamesmanship involved with earnings season.

How Earnings Season Affects Stocks

Analysts develop earnings estimates.

Companies want to beat those expectations.

If the company beats, the stock price often moves higher.

It’s typical for sell-offs to greet earnings misses.

You may think analysts want to get the best estimate possible.

They do, but the best estimate might be one that is low.

If estimates are too high, management teams get upset with analysts and restrict their access to information.

No one on Wall Street wants that, so estimates are almost always too low.

In a typical quarter, about three-quarters of companies beat expectations.

As we head into earnings season, estimates might still be a little high.

A Steep Drop in Earnings Rings Recession Bell

The chart below shows estimates for the companies in the S&P 500.

They are all indexed to start at 100 so we can see the trend in revisions.

Analysts were optimistic until June.

That’s when companies started announcing steep cuts.

Reported earnings were 15% below the highest estimates for the second quarter, which ended in June.

Since then, analysts have reduced expectations by 6% for the current quarter.

And the chart shows that trend will continue throughout the end of the year and into 2023.

If a recession is coming, earnings may have a sharp drop.

Earnings fell 22% in the 2020 recession.

That was a special circumstance because the drop was driven by the pandemic.

Earnings fell 57% in the 2008 recession. That was another special circumstance caused by the global financial crisis.

In 2000, earnings declined 32% during the recession. A weak economy and Federal Reserve policies caused that one.

No matter which recession we look at, there is always a steep drop in earnings.

Bottom line: Expect that this time.

For now, neither analysts nor investors are prepared.

Michael Carr is the editor of True Options Masters, One Trade, Precision Profits and Market Leaders. He teaches technical analysis and quantitative technical analysis at the New York Institute of Finance. Follow him on Twitter @MichaelCarrGuru.

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