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And read on to see what analyst Clint Brewer says could impact the next big move in stocks…

It’s easy to get caught up in 2023’s hot start for the stock market.

After all, the S&P 500 was up 6% in January.

But past bear markets hold important lessons for today’s investors.

For example, during the “dot-com” bear market in January 2001, the S&P kicked off the year with a 3.5% jump. From there, the index went on to plunge as much as 26% that year.

That decline was driven primarily by a freefall in corporate earnings, which in 2001 fell by 21%.

But this bear market has been a different story… so far.

During 2022’s decline that took the S&P 19% lower, earnings helped save the stock market from an even worse fate.

Once fourth quarter results are tallied over the coming weeks, earnings are expected to have increased modestly last year.

But that’s changing, and there are emerging signs that corporate earnings are moving from a tailwind to a major headwind.

Here’s how that could impact the next big move in stocks…

A Profit Recession

Last week, I showed you an indicator with a perfect track record of spotting recessions… and it’s flashing a warning signal once again.

That’s a big concern for investors because recessions can take a big bite out of corporate earnings and drive stock prices lower.

Just consider the S&P 500’s earnings drawdown from the last three recessions.

That includes a drop of 54% during the early 2000s… 92% in the financial crisis… and most recently a 33% decline following the pandemic.

The drop in corporate profits was a major driver behind the S&P 500’s decline, which ranged from -34% to -55% in each of those bear markets.

Now I’m concerned that falling earnings could deliver the next bear market phase this time around.

There are signs that the challenges facing the economy are starting to take a toll on the profit outlook.

Here’s the key metric I’m watching as earnings reports keep rolling in…

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Falling Earnings Estimates

The fourth quarter reporting season is well underway, and this week will see reports from corporate heavyweights like Apple (AAPL), Amazon (AMZN), and Google-parent Alphabet (GOOGL).

You’ll hear stats like how 69% of companies reporting are beating earnings estimates for the most recent quarter.

But those figures don’t matter – they reflect the past, and not what lies ahead.

To see what I mean, take a look at how 2023’s earnings estimate for the S&P 500 is evolving in the chart below…


Back in June, analysts were estimating that earnings for the S&P 500 would hit nearly $250 per share this year.

That figure has steadily dropped each passing month and is now 10% lower versus six months ago. And that estimate is hitting a territory that would imply a negative year-over-year growth rate in earnings for 2023.

That means slowing economic activity and inflating costs are already pressuring the bottom line… and we haven’t even seen a recession yet.

That’s why I’m concerned that corporate profits could have much further to drop as the year unfolds.

Traders should also stay cautious and not let greed get the best of them as the new year gets underway.

Best regards,

Clint Brewer
Analyst, Market Minute

Reader Mailbag

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