Brace for big cuts to corporate earnings as companies adjust to a tougher credit environment, Bank of America says

A Filipino trader rubs his eyes as a downside trend is shown on the screen of the Philippine Stocks and Exchange in Manila.

Erik de Castro/Reuters

• Investors should expect more downside to earnings estimates for 2023, Bank of America said.
• "We forecast an in-line quarter, but the focus will be on guidance and tighter credit conditions impacting capex/buybacks."
• BofA sees earnings for S&P 500 companies coming in at $200 per share.

Companies will continue to deliver big cuts to earnings expectations in a tighter credit environment, Bank of America said.

"We forecast an in-line quarter, but the focus will be on guidance and tighter credit conditions impacting capex/buybacks," analysts said in a note.

Cuts to earnings estimates tend to accelerate once the economy enters a recession, the bank warned. And so far, cuts this year are lagging those seen in prior downturns.

First-quarter earnings forecasts for S&P 500 companies have seen a 6% cut, according to BofA. But after 2000 – near the crux of the dot-com bubble burst – quarterly earnings expectations were slashed five quarters in a straight by an average 12% each quarter.

And following the 2008 financial crisis, earnings per share estimates were cut six quarters straight by an average 20% per quarter. 

Meanwhile, Wall Street forecasters have trimmed 2023 earnings estimates 13% to $220 per share from around $250 a share. But 2023 EPS estimates will likely trend even lower to $200 per share, Bank of America said.

Forecasters have been warning of anemic corporate earnings this year as the economy faces a potential downturn. Central bankers have hiked interest rates to their highest levels since 2007, which experts say could easily overtighten the economy into a recession.

The risk of downside has been amplified with the recent crash of Silicon Valley Bank, which wiped out some regional lenders and put a major hole in banks' balance sheets. That's likely to make banks less willing to lend, tightening the economy even further.

More bearish commentators have warned of an earnings recession to hit the market as firms continue to get battered in the current macro environment. Morgan Stanley predicted that stocks could soon face the biggest earnings recession since 2008, and previously predicted that the S&P 500 could soon plunge 26%.

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