“We suspect the uncertainty that these factors foster will lead to both guidance pulls and lowered guidance, both headwinds for forward earnings estimates,” Wilson said. And the expected decline in earnings expectations could be big because so far, forward earnings estimates have fallen by just 1% since mid-June.
“It takes a long time for next twelve months EPS to fall for the S&P 500 because it’s a very high quality, diversified index and companies are loathe to throw in the towel on the future quarters until they have to. It appears that more companies are reaching that point where they can’t fight it anymore,” he explained.
Wilson would like the S&P 500’s forward EPS estimates to decline to $225 or below, combined with either a rising equity risk premium or declining ISM PMIs, before he gets confident that a sustainable low has been made in the stock market. The forward EPS estimate for the S&P 500 is currently at $237.
“Bottom line, in the absence of a Fed pivot, stocks are likely headed lower. Conversely, a Fed pivot, or the anticipation of one, can lead to a sharp rally especially because we are so oversold… Just keep in mind that the light at the end of the tunnel you might see if that happens is actually the freight train of the oncoming earnings recession that the Fed cannot stop at this point,” Wilson concluded.
