Weak Earnings Are A Good Sign?

Analysts are projecting that fourth quarter earnings will decline for the first time in two years as rising rates and slower growth hits the economy. 

Goldman Sachs recently cut its 2023 S&P earnings per share growth forecast to zero. 

For the fourth quarter, analysts are forecasting a 0.4% fall in year-over-year earnings for S&P 500 companies. 

The last time we saw a quarterly decline in S&P 500 wide earnings was in the 3rd quarter of 2020. 

So far, none of this information sounds positive at all. But I think it may actually be an indication that we’ve already hit a market bottom. 

In the chart below we see that as earnings fall it tends to mean that the bottom is behind us. 

The Red line represents earnings, and black line represents the value of the S&P 500. 

In most cases the earnings, (the red line) dip after the market, (the black line) has reached its trough. 

I believe this pattern exists because the market is both forward looking, and analysts tend to overshoot to the upside and downside. 

When earnings finally do fall, it may not be quite as bad as expected and investors are already looking into the future.