Skip to main content

August 2022 / VIDEO

A Fall in Earnings Estimates Could Worsen Sell-Off

Attractive stock prices are based on optimistic earnings estimates.

Key Insights

  • Rising recession concerns have exacerbated the stock market sell‑off, and major indexes are now in or near bear market territory.
  • Given optimistic forward earnings estimates, we believe current stock prices may not have fully baked in a recessionary scenario.

Deepening recession concerns have caused stocks to sell off precipitously in 2022, and major indexes recently reached bear market territory—meaning that they had fallen at least 20% from their recent highs. An in‑depth look at the sell‑off reveals that it has primarily been driven by a decrease in price‑to‑earnings (P/E) multiples (Figure 1).

Anatomy of the 2022 Sell‑Off

(Fig. 1) The price‑to‑earnings (P/E) ratio of the S&P 500 has declined, but forward earnings estimates remain overly optimistic

Anatomy of the 2022 Sell‑Off

Past performance is not a reliable indicator of future performance.
Source: S&P. T. Rowe Price analysis using data from FactSet Research Systems Inc. All rights reserved. See Additional Disclosures. Bloomberg Finance, L.P. 
Actual outcomes may differ materially from estimates. Estimates are subject to change

Although some investors may conclude that stock valuations have now become reasonable, it is important to note that, despite numerous signs of looming economic weakness, earnings estimates have not adjusted downward this year. So far in 2022, the 12‑month forward earnings estimates have, in fact, risen by 4%. Therefore, while the current P/E ratio seems attractive, it is based on a very optimistic outlook for company earnings.

For investors evaluating the current market environment, a review of historical data showing how earnings estimates have behaved during past recessions can be informative. Notably, an analysis of earnings estimates for companies listed on the S&P 500 Index since 1990 shows that during each of the past four recessions, earnings estimates fell sharply, with an average drop of 22% (Figure 2).

How Far Could Earnings Estimates Fall?

(Fig. 2) Earnings estimates have fallen meaningfully during past recessions

How Far Could Earnings Estimates Fall?

January 1990 to June 2022.
Sources: T. Rowe Price analysis using data from FactSet Research Systems Inc. All rights reserved. See Additional Disclosures. Bloomberg Finance, L.P.
Actual outcomes may differ materially from estimates. Estimates are subject to change.

Overall, stock prices seem more reasonably priced relative to their peaks early in the year. However, in our view, a recessionary scenario may not be fully baked in to the current share prices because earnings expectations remain too optimistic. As a result, our outlook remains cautious, and our Asset Allocation Committee maintained an underweight allocation to stocks relative to bonds.

Additional Disclosures

The S&P 500 Index is a product of S&P Dow Jones Indices LLC, a division of S&P Global, or its affiliates (“SPDJI”) and has been licensed for use by T. Rowe Price. Standard & Poor’s® and S&P® are registered trademarks of Standard & Poor’s Financial Services LLC, a division of S&P Global (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”); T. Rowe Price is not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, or their respective affiliates, and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the S&P 500 Index.

Financial data and analytics provider FactSet. Copyright 2022 FactSet. All Rights Reserved.


This material is being furnished for general informational and/or marketing purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, nor is it intended to serve as the primary basis for an investment decision. Prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.

The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction.

Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources' accuracy or completeness. There is no guarantee that any forecasts made will come to pass.

The views contained herein are as of the date noted on the material and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.

The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request.

It is not intended for distribution to retail investors in any jurisdiction.  

Canada – Issued in Canada by T. Rowe Price (Canada), Inc. T. Rowe Price (Canada), Inc.’s investment management services are only available to Accredited Investors as defined under National Instrument 45-106. T. Rowe Price (Canada), Inc. enters into written delegation agreements with affiliates to provide investment management services.

© 2022 T. Rowe Price. All Rights Reserved. T. ROWE PRICE, INVEST WITH CONFIDENCE, and the Bighorn Sheep design are, collectively and/or apart, trademarks of T. Rowe Price Group, Inc.

Previous Article


Active Stock Choices Are Key in Volatile Times
Next Article

August 2022 / FIXED INCOME

High Yield Bonds Appear Well Positioned for a Recession

You are now leaving the T. Rowe Price website

T. Rowe Price is not responsible for the content of third party websites, including any performance data contained within them. Past performance is not a reliable indicator of future performance.