Just as the stock market is trying to find its footing, fourth-quarter earnings season has taken a turn for the worse.

Home Depot (NYSE: HD) and Walmart (NYSE: WMT) on Tuesday delivered mixed operating results, sending their share prices sharply down.

Home Depot beat on earnings and missed on revenue; Walmart beat on the top and bottom lines. Both companies provided weak guidance. Consumer spending accounts for about 70% of U.S. gross domestic product, so these two retail giants are economic bellwethers.

It’s no surprise when stocks fall after missing estimates, but when I see them drop after beating earnings and revenue expectations, the stock market can feel like a minefield.

Case in point: Shopify (NYSE: SHOP) released fourth-quarter revenue and earnings that handily topped analyst estimates on both the top and bottom lines.

The e-commerce giant posted $1.7 billion in revenue, representing a 26% year-over-year increase. The company also posted $798.5 million in earnings, for a 15% year-over-year increase. Those are hefty increases amid a slowing economy.

And yet, SHOP shares plunged anyway, largely because the company’s guidance for the first quarter was slightly softer-than-expected.

Sometimes, good just isn’t good enough, especially when bearish sentiment is spreading across the broad stock market.

A sub-par fourth quarter…

There’s no denying that the fourth-quarter 2022 earnings performance of S&P 500 companies continues to be underwhelming.

To date, about 82% of the companies in the S&P 500 have posted actual results for Q4 2022. Among these companies, 68% have reported actual earnings above consensus estimates, which is below the 10-year average of 73%.

The blended earnings decline for the fourth quarter is -4.7%. “Blended” combines actual results for companies that have reported and estimated results for companies that have yet to report.

If -4.7% is the actual decline for the quarter, it will mark the first time the index has reported a year-over-year decrease in earnings since Q3 2020 (-5.7%).

Four of the 11 S&P 500 sectors are reporting year-over-year earnings growth, led by energy and industrials. Seven sectors are reporting a year-over-year decline in earnings, led by communication services, materials, and consumer discretionary. The following chart tells the story:

The Q4 revenue performance of S&P companies has been more positive than the earnings performance. Overall, 65% of S&P 500 companies have reported actual revenues above estimates, which is above the 10-year average of 63%.

The blended revenue growth rate for the fourth quarter is 5.1%. If that number is the actual growth rate for the quarter, it will mark the lowest revenue growth rate reported by the index since Q4 2020 (3.2%).

Heading into Q4 earnings season, analysts were too optimistic. They overestimated year-over-year earnings growth, due to unrealistic assumptions about the economy, inflation, and Federal Reserve policy.

This disconnect has resulted in fewer companies beating earnings estimates than average and some large-cap sector barometers badly missing estimates.

As of this writing, the S&P 500 is reporting a bigger earnings decline (-4.7%) relative to expectations at the end of the quarter (-3.3%) on December 31. The path of earnings revisions has been downward.

More worrisome is that several companies across a variety of sectors have been announcing lower or muted guidance for Q1 2023, as evidenced this week by Home Depot and Walmart.

The main U.S. stock market indices closed mixed Wednesday, as follows:

• DJIA: -0.26%
• S&P 500: -0.16%
• NASDAQ: +0.13%
• Russell 2000: +0.34%

The S&P 500 posted its fourth day of losses. Weighing on stocks was the release of minutes from the Fed’s most recent meeting, in which officials reaffirmed their conviction that the fight against inflation isn’t over.

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John Persinos is the editorial director of Investing Daily.

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