The earnings recession has started - but here's why it hasn't hit stocks yet, according to DataTrek

• So far, 68% of S&P 500 companies have beat Wall Street analysts' fourth-quarter estimates, lower than the five-year average of 77%.
• Earnings also saw a 4.8% year-over-year decline, which marks the first decline since 2020, DataTrek Research highlighted.

An earnings recession for US companies has started, according to a Monday note from DataTrek Research, yet US equities have stayed mostly flat over recent months.

So far, 68% of S&P 500 companies have beat Wall Street analysts' fourth-quarter estimates, lower than the five-year average of 77%.

Profits are also down 4.8% year-over-year, the largest drop since late 2020, and Wall Street analysts see declines of 4% to 7% in the next two quarters, respectively.

In fact, Wall Street has trimmed estimates for all of 2023, as shown in the chart below.

Yet from November 17 until Friday's close, the S&P 500 has ticked 0.6% higher. In other words, earnings have tumbled but remain disconnected from a relatively resilient stock market.

DataTrek listed a couple reasons stocks haven't reflected downbeat earnings.

First, markets have already discounted the bad fourth-quarter results, as well as analysts' first- and second-quarter estimates.

The second reason stocks haven't adjusted lower with earnings comes down to a reassessment of valuations.

As DataTrek cofounder Nicholas Colas wrote:

"[M]arkets believe $50/share (Q1 2023's estimate, rounded down slightly) is the S&P's trough earnings power. This translates into $200/share annually, and a 20x multiple on that number gets you to S&P 4000, a level we have visited time and again since mid-May 2022."