There’s a lot of skepticism out there about US corporate profits.

I realize this is repetitive, but then again, earnings season is upon us in the US, and unless you believe in miracles, the next three quarters will be defined by slower and, ultimately, negative, EPS growth.

The question isn’t really about whether bottom-up consensus is too optimistic. It almost surely is. Company analysts are taking their cues from the C-suite, and management isn’t going to deliver bad news any earlier than it has to. For what it’s worth, consensus is around $230. Put a 17x multiple on that and you get… well, Wednesday’s price, actually.

Top-down estimates are more realistic. Goldman, for example, is at $224, which implies no growth from 2022’s index-level aggregate EPS. In a recession scenario, the bank’s David Kostin has earnings falling 11% YoY to $200. Morgan Stanley’s Mike Wilson expects $195, but sees downside to $180 in a bear case. Generally speaking, the buy-side is somewhere between $210 and $215.

If you ask Barclays, consensus looks “increasingly unrealistic.” The bank recently cut its top-down forecast to $207 and, in a new note, warned on the implications from a resilient US labor market.

“There is a growing probability that companies decide not to reduce headcount as aggressively as they have in past recessions due to structural shortages in labor supply post-COVID, keeping the labor market tight as inflation begins to wane,” analysts led by Venu Krishna wrote, before cautioning that “robust labor demand is a double-edged sword: While durable employment may provide an economic backstop, it can also exacerbate the sticky labor costs that are a key component of our negative operating leverage outlook for equities, making Street consensus 2023 EPS estimates look increasingly unrealistic.”

If the negative operating leverage point gives you déjà vu, that’s because it’s the top-down topic du jour — and for good reason. Morgan Stanley’s Wilson is adamant that market participants are underestimating the potential drag.

For their part, Barclays isn’t entirely convinced that multiples have bottomed either. The bank sees fair value at 15x.

“The market appears to be priced for perfection, already looking to a soft landing with inflation only just beginning to moderate,” Krishna said, cautioning that “the gap between YoY changes in ISM Manufacturing and the equity risk premium has widened to unprecedented levels and valuations are now discounting a moderation in trimmed mean PCE inflation to 2–3% over next 12 months, based on their historical relationship.”

The end result is a market that reflects the assignment of a still-rich multiple to an unrealistic earnings outlook. Barclays’ base case (50% probability) calls for a shallow recession with S&P EPS falling 6.5% YoY to $207.

The bank’s bear case (40% probability) includes a “normal” recession, with index-level earnings contracting 13% to $190. Even in the bull case, earnings contract. The bank puts the odds of a soft landing at just 10%.

Enthusiastic bulls are something of an endangered species these days among top-down equity strategists. Or at least it seems that way. There’s probably a contrarian indicator joke in there, but that kind of cheap humor is too obvious for my liking.