Earnings Growth On Trend, Despite Falling Expectations

January 10, 2023

By Tim Courtney, Chief Investment Officer


We are coming off a two-year market rollercoaster: markets were ecstatic in 2021 and entered 2022 like a lion and then went out like a lamb. We start 2023 with low expectations from economists and investors, with some expecting earnings to decline.1

We’ve previously discussed how loose fiscal and monetary policies by the government and The Federal Reserve created distortions throughout markets in 2020 and 2021. For us, 2022 will be remembered as the year those distortions (house buying mania, negative yield bonds, crypto craze, money-losing tech companies, record amounts of leveraging/borrowing) began being washed out of markets. This is a healthy development, but productive assets and companies are also being affected as markets move. We want to put this in some perspective as 2023 earnings expectations begin to fall.

2021 earnings may be a distortion. When the pandemic hit, we saw the economy grind to a halt with shutdowns and supply chain problems wreaking havoc across markets. But in 2021, we saw a rebound with huge growth and record profits at $208 per S&P 500 index share.2 When earnings hit a new high, investors tend to use that as the new baseline for expectations moving forward. However, 2021’s massive growth (32% higher than 2019’s earnings) may not make for an accurate baseline since profits were spurred higher by unsustainable and inflationary policies. In hindsight 2021 looks less like a baseline number and more like another distortion.

The long-term trend. Because of 2020’s stunted earnings and 2021’s record smashing earnings, it may make more sense to look at earnings across multiple years as a longer-term trend. Over the last five years (end of 2017 to end of 2022), earnings growth averaged 10% per year, assuming S&P 500 earnings for 2022 end up around $200. That is well above long-term average growth of about 5% to 6% per year. Some analysts are now estimating S&P 500 earnings per share for 2023 to again be about $200, down about 10% from an earlier forecast of $225.3 Even if the lower forecast is correct, the five-year earnings growth (end of 2018 to end of 2023) would be 5.5%, nearly right on long-term average growth. 

The market seems to be discounting stocks most sensitive to a slowdown. As recession concerns reach fever pitch, value, mid and small cap stocks, which tend to be most vulnerable to economic downturns, are trading below the average valuations of the last 20 years. In contrast, growth and larger companies, which tend to be in a stronger position and are less sensitive to recessions, are priced at a premium compared to 20-year average valuations. This could indicate that the market is already factoring a 2023 recession, of at least some magnitude, into prices. If we do go into recession in 2023, few will be surprised. 

It’s important to keep in mind that a single year’s worth of profits, while providing info about the current health of the company, is not the most important factor determining a company’s value. Instead, the majority of a company’s value derives from earnings over the next three, five, 10 years and longer. From that standpoint, as we look ahead to 2023 earnings, the market seems to be anticipating earnings that put it on par with the long-term growth trend. If you have any questions about your portfolio, please contact your Exencial Advisor.



  1. Reuters (12/20/22) — Recession, rate hikes seen jamming brakes on global 2023 earnings growth
  2. Seeking Alpha (12/20/22) — Where will the S&P 500 be in one year?
  3. Reuters (12/1/22) — J.P. Morgan cuts 2023 S&P 500 earnings forecast by 9%


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