Many strategists have warned for months that markets have been too optimistic about earnings. However, there’s no hint just yet that investors are having second thoughts on the earnings front.

With US earnings season winding down, 69 per cent of companies have beaten estimates, according to FactSet – below the five-year average of 77 per cent. Earnings have exceeded estimates by just 1.1 per cent, way below the five-year average of 8.6 per cent. Profit margins are also sliding, notes market strategist Charlie Bilello, from 13.4 per cent a year ago to 11.2 per cent.

Despite these underwhelming figures, markets are rewarding positive earnings surprises slightly more than average, and punishing negative surprises much less than average. Is this because the earnings outlook is positive? No – the percentage of companies issuing negative guidance is much higher than usual. Similarly, analysts are lowering estimates by more than normal.

Bulls, like Fundstrat’s Thomas Lee, argue the benign market reaction to lacklustre results is a positive, suggesting bad news has already been priced in. However, bears, like Morgan Stanley’s Mike Wilson, say this is unsustainable. Forward earnings growth has now turned negative, says Wilson. That has happened four times since 2000 (in 2001, 2008, 2015 and 2020), with stocks suffering a significant downside on each occasion. Investors will be hoping that Lee is right, and that this time really is different.