As the country’s largest companies prepare to publish their results for the start of the year – to provide a picture of how the economy is doing as a banking shock reverberates – they are already warning investors to brace themselves.
For the large companies that make up the S&P 500 index, Wall Street forecasters expect earnings to fall nearly 7 percent in the first three months of 2023 from a year earlier, according to estimates compiled by FactSet. That would be the second straight quarterly drop, and the biggest since a severe – if brief – slump in the early days of the 2020 coronavirus pandemic.
The forecast marks a rapid deterioration in forecasts. At the start of the year, the consensus was that earnings would be roughly in line with the first quarter of 2022. Since then, ongoing concerns about inflation, followed by a flare-up in the banking sector in March, have worsened the outlook.
Companies have also told investors to revise their expectations, with 78 companies in the S&P 500 offering guidance on their results being below Wall Street’s median estimate. It’s true that corporate leaders often manage expectations so they can deliver investors a pleasant surprise rather than a dire shock, but such low forecasts are rarely so widespread, suggesting there could be more to it this time around, Ron said. Temple, chief market strategist at Lazard.
“We are more likely to be disappointed than positively surprised,” he said.
Everyone wants to hear from the country’s big banks.
The first group to report results happens to be the industry investors are most eager to hear about. Major banks including JPMorgan Chase, Citigroup and Wells Fargo will release their results Friday, the first formal update for the industry since the collapse of Silicon Valley Bank last month.
Investors and analysts note that it’s probably too early to see the full impact of the March turmoil given that it came so close to the end of the quarter. Instead, attention will be focused on comments from the bank’s CEOs and CFOs about what they’ve seen recently and what to expect – both for the banks and for the economy.
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The stock and bond market downturn this year has been painful and it remains difficult to predict what the future holds.
“It’s more about the commentary and the tone,” Mr. Temple said.
A key question for investors will be how many customers have transferred their deposits from smaller regional lenders to the largest lenders, and what financial steps smaller competitors have had to take to stay afloat.
There are already signs that banks have pulled back from lending, and that could put pressure on other businesses that need money as the economy weakens.
“These CFOs better be prepared to get third grade and give details of how they’re handling it and what it looks like going forward,” said Michael Kushma, chief investment officer for broad market fixed income at Morgan Stanley Investment Management. .
Elsewhere, profit margins will be a detail to watch.
When inflation peaked last year, consumers were willing to pay higher prices that were passed on by companies facing higher costs themselves. As a result, corporate profit margins rose in 2022, to the highest level since 2008.
The Federal Reserve continued to raise interest rates in the first quarter, increasing costs for businesses and consumers. But companies are finding it increasingly difficult to keep raising prices for their customers.
For companies in the S&P 500, net profit margin, or the percentage of a company’s revenue that ends up in profit, is expected to fall to its lowest level since the end of 2020, FactSet data shows.
If companies can’t pass on costs as easily, they are likely to become more conservative in their decision making, shrinking from spending and possibly laying off workers, slowing the economy.
“We have been living with interest rates above normal for three months at a time when economic activity has slowed. What was the effect of that?” said James Masserio, co-head of equities for the Americas at Société Générale. “That will be central to people.”
While the overarching expectation is a decline in profitability, the outlook for different sectors of the stock market varies widely.
Materials companies, such as mining companies and commodity manufacturers, are expected to see their revenues drop by about a third from early 2022, according to FactSet data, as fears of a slowdown in global growth have undermined demand for a range of products . raw materials such as copper and aluminum.
Communications and technology companies are also expected to report sharp profit drops. At the other end of the spectrum, major oil producers such as Exxon Mobil and Chevron are expected to report double-digit earnings growth for the fifth consecutive quarter, and industrials for the eighth consecutive quarter, with global demand offsetting a price decline.
Delta Air Lines, one of the first major companies to report profits, reflected a mixed outlook in its own results. The company said Thursday it fell short of its first-quarter revenue and profit forecasts. But because of “record advance bookings for the summer,” it gave an optimistic forecast for growth in the second quarter.
So far, the stock market has followed suit.
Despite the deteriorating outlook, share prices are holding up. The S&P 500 has moved sideways in April so far, but is up 7 percent this year.
To some extent, that reflects the skewed composition of the index, with the colossal size of Apple, Microsoft and a handful of others, meaning gains in their share prices can support the index even as other companies falter.
The Russell 2000 index of smaller US companies, which are more sensitive to an economic downturn, was slightly lower this month, but this index also remains positive this year.
Some analysts and bankers said many investors had been preparing for a tougher time ahead in recent months and were already positioned for the bad news. That could help support market prices even as weak earnings reports roll in.
That is the optimistic outlook. The counter argument is that – despite last year’s gloomy forecasts for the economy and corporate earnings – investors have not experienced a significant slump. The new data could change that.
“It’s a big piece of the puzzle that we’re missing,” Mr. Masserio said.
Robert Copeland reporting contributed.
