The S&P 500 (INDEXSP:.INX) has fallen for nearly two straight weeks, even though companies on the index have been beating consensus 4Q EPS growth estimates by a fair margin. The trick is that analysts have been revising pre-announcement estimates down at an unprecedented rate, lowering the bar for positive surprise almost across the board.

“Of the 232 S&P 500 companies that reported 4Q13 earnings through January 30, 167 beat estimates and 38 missed, leaving a 4Q13 ratio of positive to negative surprise of 4.39x versus a 3Q13 ratio of 4.03x, and 4Q12 ratio of 3.16x thus far into the earnings reporting season,” writes Citi analyst Tobias Levkovich. “However, the awful pre-announcement trend left lowered expectations going into the releases.”

negative positive pre-ann ratio 0214 S&P 500

Analysts usually hedge their estimates

There’s evidence that analysts consistently hedge their forecasts to increase surprise in their favor, and that those who don’t are less likely remain analysts for very long. After all, clients are likely to be happy when a stock (or a short position) exceeds their expectations, and much less happy when it falls short. Accurate forecasts may be less important than client management, career-wise.

Ironically, the high ratio of negative pre-announcement revisions can be seen as a sign of how bullish everyone was just four weeks ago. While some analysts mentioned the need for tactical caution, investors have continued to be Euphoric according to Citi’s Panic/Euphoria index, and year-on-year client EPS growth expectations were at the highest point in a couple of years.

Citi panic euphoria 0214 S&P 500

client expected EPS growth 0214 S&P 500

Market could drop by another 10%

“We suspect that there is still additional downside likely with our view of a 5%-10% correction remaining intact after which the S&P 500 (INDEXSP:.INX) can move its way up to our 1,975 year-end market target,” Levkovich writes.

Recent poor market performance could be a reason to be more skeptical that companies’ earnings will justify their high stock prices and PE multiples, but Levkovich hasn’t changed his 2014 year-end target, confident that stock prices will recover. In fairness, he saw this correction coming (and recent equity outflows show that he wasn’t alone), but at some point earnings will need to meet investors’ expectations, not just the lowered estimates that come out before earnings season.