Making sense of seemingly conflicting statements about earnings estimates 📊
Plus a charted review of the macro crosscurrents 🔀
📉 The stock market fell last week, with the S&P 500 declining 1.5% to close at 5,282.70. It’s now down 14% from its February 19 closing high of 6,144.15 and up 47.7% from its October 12, 2022 closing low of 3,577.03. For more on market moves, read: Investing in the stock market is an unpleasant process 📉
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Earnings estimates for the next 12 months are rising.
And earnings estimates for 2025 and 2026 have been coming down.
The above statements sound like they’re in conflict. But they are actually two ways of communicating the same information. The differentiating factor: The passage of time.
Calendar year vs. NTM earnings estimates 📊
We often hear analysts talk about earnings estimates based on calendar years. For example, coming into this year Wall Street strategists presented their estimates for 2025 earnings.
As time passes and information emerges, analysts will adjust those estimates. Historically, analysts tend to gradually revise down these calendar year estimates. And so far, this has been the case in 2025.
However, time can pass quickly. And with calendar year estimates, what was once a discussion about future earnings can quickly become a discussion about past earnings.
For example, at the beginning of the year, 2025 earnings represented the next-12 months’ (NTM) earnings. But it’s April now, which means any discussion of 2025 earnings involves an old quarter, and any discussion of NTM earnings involves a quarter in 2026.
Morgan Stanley’s Michael Wilson shared a nice side-by-side visualization of this somewhat confusing dynamic. The chart on the left shows the S&P 500’s NTM earnings per share (EPS). As time passes, you can see NTM EPS move up as it continuously incorporates the higher earnings expected in future periods.
The chart on the right shows EPS estimates for 2025 and 2026 — static periods in time. As time passes, you can see how analysts’ estimates have moved lower in recent months.
“NTM EPS estimates continue to advance on the back of stronger 2026 EPS growth,” Wilson observed. “However, NTM EPS may show signs of flattening in recent weeks as 2025/2026 estimates revise slightly lower (-1%).”
To be clear, both charts employ the same analysts’ estimates for earnings. They just differ in the way they reflect the effect of the passage of time.
And the two charts are currently telling us that the promise of earnings growth on a rolling future basis is more than offsetting deteriorating expectations for static periods.
This is important in the context of valuation metrics like the forward price-earnings (P/E) ratio. If earnings are expected to grow, then forward earnings (E) will rise as time passes. This leads to downward pressure on P/E ratios.
Be mindful in this uncertain environment 🤔
As we discussed last week, there are currently a lot of issues with analysts’ earnings estimates. Uncertainty is very high, and there's evidence that the earnings estimates out there right now are stale.
But again, both visualizations are working off the same estimates. So if we believe the estimates for E is off, discussions about both NTM and calendar year estimates will similarly be off.
The bottom line: Be mindful about what you read and hear about earnings estimates. While it can be helpful to know what’s going on with revisions in certain calendar years, the information for a particular year will become less relevant as time passes. This is why it’s arguably more useful to look to NTM earnings because stock prices are heavily determined by expectations for the future.
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Review of the macro crosscurrents 🔀
There were several notable data points and macroeconomic developments since our last review:
🛍️ Shopping ticks higher. Retail sales increased 1.4% in March to a record $734.9 billion.
Unfortunately, there’s evidence that recent spending has been boosted by consumers front-running tariffs. The 5.3% jump in car and car parts sales is in line with this trend. From Renaissance Macro’s Neil Dutta: “It’s challenging to get a proper signal from retail sales data at the moment. Households are taking tariffs seriously and we have seen a front running of activity, particularly in consumer durables. Ultimately, follow underlying growth. It’s been softening.“
For more on consumer spending, read: We're gonna get ambiguous signals in the economic data 😵💫 and Americans have money, and they're spending it 🛍️
💳 Card spending data is holding up. From JPMorgan: “As of 10 Apr 2025, our Chase Consumer Card spending data (unadjusted) was 3.0% above the same day last year. Based on the Chase Consumer Card data through 10 Apr 2025, our estimate of the US Census April control measure of retail sales m/m is 0.50%.”
From BofA: “Total card spending per HH was up 2.3% y/y in the week ending Apr 12, according to BAC aggregated credit & debit card data. Among the categories we show, the biggest gains relative to last week were in entertainment, online electronics & grocery. The increase could be due to a dual boost from upcoming Easter and front-loading due to tariff uncertainty.“
Similar to March retail sales, April spending is likely being boosted by consumers pulling forward purchases in an attempt to front-run tariffs.
For more on consumer spending, read: We're gonna get ambiguous signals in the economic data 😵💫 and Americans have money, and they're spending it 🛍️
💼 Unemployment claims tick lower. Initial claims for unemployment benefits declined to 215,000 during the week ending April 12, down from 224,000 the week prior. This metric continues to be at levels historically associated with economic growth.
For more context, read: A note about federal layoffs 🏛️ and The labor market is cooling 💼
⛽️ Gas prices tick lower. From AAA: “As spring break travel winds down, gas prices are following suit, down five cents since last week. Softer demand is fueling this downward trend, and with crude as low as it’s been in a few years, drivers may continue to see lower pump prices as summer approaches.”
For more on energy prices, read: Higher oil prices meant something different in the past 🛢️
👎 Inflation expectations heat up. From the New York Fed’s March Survey of Consumer Expectations: “Median inflation expectations increased by 0.5 percentage point to 3.6% at the one-year-ahead horizon, were unchanged at 3.0% at the three-year-ahead horizon, and decreased by 0.1 percentage point to 2.9% at the five-year-ahead horizon.”
The introduction of tariffs as proposed by president-elect Donald Trump would be inflationary. For more, read: 5 outstanding issues as President Trump threatens the world with tariffs 😬
👎 New York area managers are worried about the future. From the NY Fed’s Empire State Manufacturing Survey: “Firms expect conditions to worsen in the months ahead, a level of pessimism that has only occurred a handful of times in the history of the survey. The index for future general business conditions fell twenty points to -7.4; the index has fallen a cumulative forty-four points over the past three months. New orders and shipments are expected to fall slightly in the months ahead. Capital spending plans were flat. Input and selling price increases are expected to pick up, and supply availability is expected to worsen over the next six months.“
From the NY Fed’s Business Leaders Survey: “After plunging twenty-five points last month, the index for future business activity sank another twenty-three points to -26.6, its lowest reading since April 2020, indicating that firms expect a significant decline in activity in the months ahead. The index for the future business climate also fell twenty-three points, to -50.0, marking its lowest level since 2009 and suggesting the business climate is expected to remain considerably worse than normal. The future employment index turned negative. The future supply availability index dropped to -36.1, with 44 percent of firms expecting supply availability to be worse in six months. Capital spending plans turned sharply negative.“
Keep in mind that during times of perceived stress, soft survey data tends to be more exaggerated than actual hard data.
For more on this, read: What businesses do > what businesses say 🙊
🛠️ Industrial activity ticks lower. Industrial production activity in March declined 0.3% from the prior month. Manufacturing output increased 0.3%.
For more on economic activity cooling, read: 9 once-hot economic charts that cooled 📉
🔨 New home construction starts fall. Housing starts fell 11.4% in March to an annualized rate of 1.32 million units, according to the Census Bureau. Building permits ticked up 1.6% to an annualized rate of 1.48 million units.
🏠 Homebuilder sentiment ticks up. From the NAHB’s Buddy Hughes: “The recent dip in mortgage rates may have pushed some buyers off the fence in March, helping builders with sales activity. At the same time, builders have expressed growing uncertainty over market conditions as tariffs have increased price volatility for building materials at a time when the industry continues to grapple with labor shortages and a lack of buildable lots.”
🏠 Mortgage rates rise. According to Freddie Mac, the average 30-year fixed-rate mortgage increased to 6.83% from 6.62% last week. From Freddie Mac: “The 30-year fixed-rate mortgage ticked up but remains below the 7% threshold for the thirteenth consecutive week. At this time last year, rates reached 7.1% while purchase application demand was 13% lower than it is today, a clear sign that this year’s spring homebuying season is off to a stronger start.”
There are 147.4 million housing units in the U.S., of which 86.9 million are owner-occupied and about 34.1 million of which are mortgage-free. Of those carrying mortgage debt, almost all have fixed-rate mortgages, and most of those mortgages have rates that were locked in before rates surged from 2021 lows. All of this is to say: Most homeowners are not particularly sensitive to movements in home prices or mortgage rates.
For more on mortgages and home prices, read: Why home prices and rents are creating all sorts of confusion about inflation 😖
😬 This is the stuff pros are worried about. According to BofA’s April Global Fund Manager Survey: “Trade war triggering a global recession is viewed as the biggest 'tail risk' according to 80% of investors, the largest concentration for a 'tail risk' in 15-year history.”
For more on risks, read: When uncertainty becomes unambiguously high 🎢, Three observations about uncertainty in the markets 😟 and Two times when uncertainty seemed low and confidence was high 🌈
📉 Near-term GDP growth estimates are tracking negative. The Atlanta Fed’s GDPNow model sees real GDP growth declining at a 2.2% rate in Q1. Adjusted for the impact of gold imports and exports, they see GDP falling at a 0.1% rate.
For more on GDP and the economy, read: 9 once-hot economic charts that cooled 📉 and You call this a recession? 🤨
Putting it all together 🤔
🚨 The tariffs announced by President Trump as they stand threaten to upend global trade — with significant implications for the U.S. economy, corporate earnings, and the stock market. Until we get some more clarity, here’s where things stand:
Earnings look bullish: The long-term outlook for the stock market remains favorable, bolstered by expectations for years of earnings growth. And earnings are the most important driver of stock prices.
Demand is positive: Demand for goods and services remains positive, supported by healthy consumer and business balance sheets. Job creation, while cooling, also remains positive, and the Federal Reserve — having resolved the inflation crisis — has shifted its focus toward supporting the labor market.
But growth is cooling: While the economy remains healthy, growth has normalized from much hotter levels earlier in the cycle. The economy is less “coiled” these days as major tailwinds like excess job openings have faded. It has become harder to argue that growth is destiny.
Actions speak louder than words: We are in an odd period given that the hard economic data has decoupled from the soft sentiment-oriented data. Consumer and business sentiment has been relatively poor, even as tangible consumer and business activity continue to grow and trend at record levels. From an investor’s perspective, what matters is that the hard economic data continues to hold up.
Stocks are not the economy: Analysts expect the U.S. stock market could outperform the U.S. economy, thanks largely due to positive operating leverage. Since the pandemic, companies have adjusted their cost structures aggressively. This has come with strategic layoffs and investment in new equipment, including hardware powered by AI. These moves are resulting in positive operating leverage, which means a modest amount of sales growth — in the cooling economy — is translating to robust earnings growth.
Mind the ever-present risks: Of course, this does not mean we should get complacent. There will always be risks to worry about — such as U.S. political uncertainty, geopolitical turmoil, energy price volatility, cyber attacks, etc. There are also the dreaded unknowns. Any of these risks can flare up and spark short-term volatility in the markets.
Investing is never a smooth ride: There’s also the harsh reality that economic recessions and bear markets are developments that all long-term investors should expect to experience as they build wealth in the markets. Always keep your stock market seat belts fastened.
Think long term: For now, there’s no reason to believe there’ll be a challenge that the economy and the markets won’t be able to overcome over time. The long game remains undefeated, and it’s a streak long-term investors can expect to continue.
For more on how the macro story is evolving, check out the previous review of the macro crosscurrents »
Key insights about the stock market 📈
Here’s a roundup of some of TKer’s most talked-about paid and free newsletters about the stock market. All of the headlines are hyperlinked to the archived pieces.
10 truths about the stock market 📈
The stock market can be an intimidating place: It’s real money on the line, there’s an overwhelming amount of information, and people have lost fortunes in it very quickly. But it’s also a place where thoughtful investors have long accumulated a lot of wealth. The primary difference between those two outlooks is related to misconceptions about the stock market that can lead people to make poor investment decisions.
The makeup of the S&P 500 is constantly changing 🔀
Passive investing is a concept usually associated with buying and holding a fund that tracks an index. And no passive investment strategy has attracted as much attention as buying an S&P 500 index fund. However, the S&P 500 — an index of 500 of the largest U.S. companies — is anything but a static set of 500 stocks.
The key driver of stock prices: Earnings💰
For investors, anything you can ever learn about a company matters only if it also tells you something about earnings. That’s because long-term moves in a stock can ultimately be explained by the underlying company’s earnings, expectations for earnings, and uncertainty about those expectations for earnings. Over time, the relationship between stock prices and earnings have a very tight statistical relationship.
Stomach-churning stock market sell-offs are normal🎢
Investors should always be mentally prepared for some big sell-offs in the stock market. It’s part of the deal when you invest in an asset class that is sensitive to the constant flow of good and bad news. Since 1950, the S&P 500 has seen an average annual max drawdown (i.e., the biggest intra-year sell-off) of 14%.
How the stock market performed around recessions 📉📈
Every recession in history was different. And the range of stock performance around them varied greatly. There are two things worth noting. First, recessions have always been accompanied by a significant drawdown in stock prices. Second, the stock market bottomed and inflected upward long before recessions ended.
In the stock market, time pays ⏳
Since 1928, the S&P 500 generated a positive total return more than 89% of the time over all five-year periods. Those are pretty good odds. When you extend the timeframe to 20 years, you’ll see that there’s never been a period where the S&P 500 didn’t generate a positive return.
What a strong dollar means for stocks 👑
While a strong dollar may be great news for Americans vacationing abroad and U.S. businesses importing goods from overseas, it’s a headwind for multinational U.S.-based corporations doing business in non-U.S. markets.
Economy ≠ Stock Market 🤷♂️
The stock market sorta reflects the economy. But also, not really. The S&P 500 is more about the manufacture and sale of goods. U.S. GDP is more about providing services.
Stanley Druckenmiller's No. 1 piece of advice for novice investors 🧐
…you don't want to buy them when earnings are great, because what are they doing when their earnings are great? They go out and expand capacity. Three or four years later, there's overcapacity and they're losing money. What about when they're losing money? Well, then they’ve stopped building capacity. So three or four years later, capacity will have shrunk and their profit margins will be way up. So, you always have to sort of imagine the world the way it's going to be in 18 to 24 months as opposed to now. If you buy it now, you're buying into every single fad every single moment. Whereas if you envision the future, you're trying to imagine how that might be reflected differently in security prices.
Peter Lynch made a remarkably prescient market observation in 1994 🎯
Some event will come out of left field, and the market will go down, or the market will go up. Volatility will occur. Markets will continue to have these ups and downs. … Basic corporate profits have grown about 8% a year historically. So, corporate profits double about every nine years. The stock market ought to double about every nine years… The next 500 points, the next 600 points — I don’t know which way they’ll go… They’ll double again in eight or nine years after that. Because profits go up 8% a year, and stocks will follow. That's all there is to it.
Warren Buffett's 'fourth law of motion' 📉
Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, “I can calculate the movement of the stars, but not the madness of men.” If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.
Most pros can’t beat the market 🥊
According to S&P Dow Jones Indices (SPDJI), 65% of U.S. large-cap equity fund managers underperformed the S&P 500 in 2024. As you stretch the time horizon, the numbers get even more dismal. Over a three-year period, 85% underperformed. Over a 10-year period, 90% underperformed. And over a 20-year period, 92% underperformed. This 2023 performance follows 14 consecutive years in which the majority of fund managers in this category have lagged the index.
Proof that 'past performance is no guarantee of future results' 📊
S&P Dow Jones Indices found that funds beat their benchmark in a given year are rarely able to continue outperforming in subsequent years. For example, 334 large-cap equity funds were in the top half of performance in 2021. Of those funds, 58.7% came in the top half again in 2022. But just 6.9% were able to extend that streak through 2023. If you set the bar even higher and consider those in the top quartile of performance, just 20.1% of 164 large-cap funds remained in the top quartile in 2022. No large-cap funds were able to stay in the top quartile for the three consecutive years ending in 2023.
The odds are stacked against stock pickers 🎲
Picking stocks in an attempt to beat market averages is an incredibly challenging and sometimes money-losing effort. In fact, most professional stock pickers aren’t able to do this on a consistent basis. One of the reasons for this is that most stocks don’t deliver above-average returns. According to S&P Dow Jones Indices, only 24% of the stocks in the S&P 500 outperformed the average stock’s return from 2000 to 2022. Over this period, the average return on an S&P 500 stock was 390%, while the median stock rose by just 93%.
