2023 earnings estimates are all over the place … retail spending nosedives … strong demand for oil in 2023 … another cautionary investment tale
The biggest influence on your portfolio in 2023 won’t be the inflation rate – it will be earnings, and the extent to which Wall Street has correctly priced in their true condition.Here in the Digest, we’ve been cautious in recent months, concerned that 2023 earnings estimates remain too high.We fear they don’t reflect the economic pain-in-the-pipeline that’s headed our way thanks to this year’s interest rate hikes.Remember, there’s a lag time of roughly six to eight months between a Fed rate hike and when the economy feels the sting of that rate hike.So, conditions today reflect the Fed’s hikes that took place before roughly April through June. We’ll split the difference and say “May” to make it easy. That means we’re feeling the effects of the March hike of 0.25% and the May hike of 0.50%.Now, consider the avalanche of rate hikes that have happened since then…June – 0.75%… July – 0.75%… September – 0.75%… November – 0.75%… December – 0.50%…That’s a tremendous amount of economic tightening baked into the cake that’s going to hit corporate earnings in 2023.Even though some analysts are finally reducing their earnings forecasts, they’re still calling for growth. Meanwhile, strategists expect an earnings recession.What’s the difference?Here’s CNBC to help explain and provide details:
Analysts — who cover individual stocks and sectors — have been reducing 2023 earnings estimates at a fairly rapid pace. At the beginning of October, next year’s earnings were expected to rise by 7.8%. Today, they are at 4.8%. Strategists, on the other hand, who look at the stock market from a top-down, “macro” perspective (they estimate prices based on economic data, not company reports), have a much dimmer perspective. At the start of December, the average 2023 estimate for S&P 500 earnings from 19 top Wall Street strategists called for them to decline by an average of 6.5%. That’s a spread of more than 11 percentage points between the strategists and analysts. Even assuming that analysts are historically an optimistic lot (they are), that is a wide spread.
If we look at price estimates for where the S&P will end next year, the forecasts are equally scattered
For example, Societe Generale expects the S&P to fall to 3,650. That’s about 7% lower than the S&P as I write Thursday morning.Meanwhile, Deutsche Bank is calling for the S&P to end 2023 at 4,500, or 15% higher.Bloomberg surveyed 17 different macro strategists at the beginning of the month and found the average estimate of where the S&P will end 2023 is just over 4,000 – which is just slightly higher than where we are today.Clearly, this is a confusing situation. We continue urging readers to keep earnings in the spotlight because we believe they will drive 2023’s market.Now, if we follow the breadcrumbs, what’s the biggest variable that will influence earnings next year?It’s the health of the U.S. consumer, which brings us to our next story.
This morning, we learned U.S. consumers are beginning to buckle
We’ve been concerned about this for months.Yes, U.S. consumers have remained “strong” with their spending all year long, but behind this strength has been snowballing credit card debt and eroding savings accounts.We’ve been worried about what happens when the credit card balances grow too high and the savings balances fall too low.Well, this morning, we learned that retail sales declined 0.6% in November. That’s significantly worse than the Dow Jones estimate of a 0.3% drop.From CNBC:
The pullback was widespread across categories. Furniture and home furnishings stores reported a decrease of 2.6%, building materials and garden centers were off 2.5% and motor vehicle and parts dealers dropped 2.3%.Even with declining gas prices, service stations sales were down just 0.1%.Online sales also decreased, falling 0.9%, while bars and restaurants increased 0.9% and food and beverage stores rose 0.8%.
To beat a dead horse, this spending slowdown reflects economic conditions based on tightening before the spring/early summer. How will consumers be faring six to eight months from today?
This past Tuesday, several of our experts answered that question. Louis Navellier, Eric Fry, and Luke Lango, sat down together to map out what is going to happen in 2023, and how to prepare your portfolio.They discussed 2023 earnings, inflation, the Fed, a possible recession, and much more. They even gave away the names of three different stocks they believe will soar next year. If you missed the replay, click here to watch the entire thing.
Meanwhile, Louis Navellier’s bullish prediction for oil prices just got a boost from OPEC
Regular Digest readers know that Louis is very bullish on top-tier oil stocks, despite the price of oil dropping steeply since the summer.Louis sees prices climbing in 2023 due to several factors including the end of President Biden’s releases from the Strategic Petroleum Reserve, China reopening its economy, increased seasonal demand, and an overall lack of supply.On Tuesday, OPEC released a report agreeing with Louis’ assessment, saying it expects “robust oil demand” in 2023.From Reuters:
World oil demand in 2023 will rise by 2.25 million barrels per day (bpd), or about 2.3%, the Organization of the Petroleum Exporting Countries (OPEC) said in a monthly report.The forecast was steady from November, after a series of downgrades.
As to just how high oil might go next year, here’s IG Bank with a roundup of price targets:
The US Energy Information Administration currently (as of the December 6, 2023) forecasts an average price of $92/barrel in 2023.A Reuters poll of 38 economists / analysts (as of the December 1, 2022) provide a median estimate of $100.50/barrel.JP Morgan Chase & Co. forecast brent crude oil to average around the $90/barrel level in 2023 (as of November 30, 2022).Goldman Sachs economists have suggested (November 8, 2022) that if China ends its lockdown policy, oil could race to $125/barrel.
Louis is calling for $120 per barrel. But even if the low forecast of $92 from U.S. Energy Information Administration is correct, that’s still roughly 20% higher than today’s price of about $77.
Finally, a reminder to be incredibly careful out there
In recent Digests, we’ve chronicled the fallout of crypto exchange FTX.The latest is disgraced founder Sam Bankman-Fried (SBF) is now facing charges that may put him behind bars – potentially for the rest of his life.From MarketWatch:
The Securities and Exchange Commission on Tuesday charged Sam Bankman-Fried with committing fraud after raising $1.8 billion from investors, as the U.S. government hammer came down on the founder and former CEO of bankrupt cryptocurrency company FTX Trading Ltd.
As SBF awaits extradition in the Bahamas, courts have denied him bail after the judge ruled his “risk of flight is so great.”But even as investors digest that debacle, yesterday brought another cautionary tale.
Federal prosecutors and the Securities and Exchange Commission charged seven social media influencers with using Twitter and Discord to commit securities fraud. Their illicit gains netted them more than $100 million before getting busted.It’s a classic pump-and-dump.Here’s more from CNBC:
The seven charged with securities fraud used the social media platforms to manipulate exchange-traded stocks in a scheme going back to at least January 2020, the SEC alleged.Through widely-followed Twitter accounts and stock trading chatrooms on Discord, the defendants allegedly “promoted themselves as successful traders,” according to an SEC press release and allegedly encouraged followers to buy stocks that they also purchased.But they did not disclose to their followers while promoting those stocks that they allegedly planned to later sell shares once prices or trading volumes rose, according to the complaint.The influencers allegedly gained a profit by pumping the stock prices and then selling once they rose, earning about $100 million in total, the SEC claims.
Here’s a list of the defendants in case you’ve been getting advice from Twitter or Discord:
On a personal note, one of my friends followed and acted on the advice of one of these defendants. Fortunately, he didn’t lose money on the trade.Just a reminder to be careful out there.Have a good evening,Jeff Remsburg
