Sky-High Earnings Expectations Need to Fall

Over the next few weeks, a steady stream of second-quarter earnings reports will reveal how companies have navigated historically high inflation, continued supply chain challenges, and shifts in consumer spending from goods to services.

Perhaps more important – those companies may offer guidance on their outlook for these and other key concerns for the rest of the year—at a time when rapid changes and headwinds in the economy and financial markets are making it difficult to predict how the final six months of 2022 will look.

Here’s what we see going into earnings season: Despite a growing chorus of voices calling for a recession, Wall Street analysts have yet to take off their rose-colored glasses regarding their earnings growth estimates for U.S. companies.

Note the massive disconnect between double-digit expectations and actual single-digit results shown in the chart:

  • The average forecasted earnings growth for the next 12 months is a robust 24.7%.
  • In stark contrast, the average company’s earnings growth over the previous 12 months was just 8.4%.


Bigger picture, note that while analysts virtually never predict negative earnings growth (the blue line in the chart), actual earnings growth does fall into negative territory fairly frequently (the orange line). Likewise, actual earnings growth rarely exceeds analysts’ earning growth estimates.

The message: Analysts’ historical tendency to be overly optimistic may very well be in effect again today. Unless estimates are revised downward for 2022, there likely will be big earnings disappointments over the next few quarters. With that in mind, we expect to see downgrades from analysts in the coming weeks—particularly if, as the current earnings season continues, a significant percentage of bellwether businesses offer challenging outlooks for their future results.


This commentary is written by Horizon Investments’ asset management team. For additional commentary and media interviews, contact Chief Investment Officer Scott Ladner at 704-919-3602 or sladner@horizoninvestments.com.

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