Bucking the negative EPS revision trend, especially with such large increases in expected profits, may eventually support higher price-to-earnings valuations for some stocks.

Conversely, negative revisions might hurt share prices over the long haul, especially if subsequent earnings estimates don’t move to an upward path.

But so far this year, most of the stocks on the second list — the one with the worst EPS estimate revisions — have risen. For some of the stocks, this action may reflect investors’ enthusiasm for companies’ cost-cutting efforts, which are expected to lower profits temporarily. When workers are laid off, severance and other expenses result in elevated expenses before cost reductions are realized.

In the case of Tesla Inc.
TSLA,
+4.79%,
the consensus 2023 EPS estimate has declined 26% since Dec. 31, reflecting lower prices for the company’s electric vehicles. But the shares are up 58% so far this year, possibly as a result of investors’ opinions that the stock’s 65% plunge in 2022 was overdone. In a note to clients on Feb. 8, Wedbush analyst Dan Ives wrote that a previous headwind — disrupted sales in China because of government measures to lower the COVID-19 infection rate — had now become a tailwind with the country’s reopening.

“[W]e are now seeing a noticeable turnaround for Chinese EV buyers favoring Tesla vs. domestic players (BYD, Nio, Xpeng),” he wrote.

So changes in estimates alone cannot tell the whole story. But they can raise flags for investors to take a closer look at the negative or positive developments they signal.

A support structure for rising stock prices

Consensus earnings estimates among analysts who work at brokerage firms are important pillars of support for stock prices over the long term. The most commonly used measure of stock valuation is the forward price-to-earnings ratio. This is a company’s current share price divided by the consensus earnings-per-share estimate for the next 12 months.

For the benchmark S&P 500
SPX,
+0.46%,
analysts expect the index’s weighted EPS to increase 2% to $222.60 in calendar 2023 from $217.25 in 2022, despite fears that a recession may be brought about by the Federal Reserve’s interest-rate increases as it works to lower inflation. According to FactSet’s estimates, the S&P 500’s EPS increased 5% in 2022 from $206.56 in 2021.

All estimates in this article are for calendar years. Because about 20% of companies in the S&P 500 have fiscal years that don’t match the calendar, and many have fiscal-quarter ends that don’t even line up with calendar-month ends, FactSet uses actual data for fiscal quarters to calculate its own calendar-year estimates, incorporating forward estimates for the current year.

The dismal revisions

According to FactSet’s data, analysts expect 275 companies among the S&P 500 to improve their profits this year. That seems to be a pretty good number, especially when the index is expected to improve its weighted EPS by only 2%. There are 223 companies for which EPS is expected to decline this year, one for which EPS is expected to be unchanged from last year and one for which estimates aren’t available.

And now for the bad trend: Among the S&P 500, 288 companies have had their consensus 2023 EPS lowered since the end of 2022, while there have been 183 upward revisions, 28 unchanged estimates and one that is not available. That makes for a sour fourth-quarter earnings season. Investors typically look for estimates to be revised upward after corporate results are announced.

A year ago, there were 258 positive 2022 EPS estimate revisions for S&P 500 companies between the end of 2021 and Feb. 14, 2022.

So we have seen 58% of S&P 500 companies with negative earnings revisions, when a year ago there were 52% with positive revisions.

That is quite a swing to experience during a stock-market rally.

These companies have bucked the trend

Here are the 20 companies in the S&P 500 whose consensus EPS estimates for calendar 2023 have increased the most on a percentage basis since the end of 2022. The list begins with Wynn Resorts Ltd.
WYNN,
+0.28%,
whose consensus 2023 EPS estimate was revised to a positive number from a previous negative number because of improved business in Macau with the lifting of COVID-19 restrictions by the Chinese government.

Click on the ticker for more about each company or exchange-traded fund.

Click here for Tomi Kilgore’s detailed guide to the wealth of information available for free on the MarketWatch quote page.

Theses companies had the worst estimate revisions this earnings season

Among the S&P 500, only four companies are expected to show net losses for calendar 2023, based on consensus estimates among analysts polled by FactSet. For all four of these companies, the consensus 2023 estimates have declined since the end of 2022, so they top this list, ordered alphabetically. After that we show the 16 other companies whose consensus 2023 EPS estimates have fallen the most since Dec. 31.

Don’t miss: Don’t fall into the Intel dividend trap: These fund managers find the stocks with growing payouts