According to Barron’s (Barron’s) report, investors received the “Goldilocks” employment report on Friday, the labor market grew but slowed down, the employment rate increased, and wage growth slowed down , reinforcing the soft landing of US economic expectations. However, when earnings season kicks off in the US next week, few expect companies to post good results in the fourth quarter of last year.
Nonfarm payrolls report boosts market sentiment
The report pointed out that if US job growth can continue without exacerbating the wage-price spiral, it may not be necessary to lead to a cooling of inflation via economic downturn. The US Federal Reserve (Fed) is likely to announce its victory over inflation this year and ease monetary policy, triggering a rally across all asset classes. The above is an optimistic view.
US stocks closed higher on Friday, capping off a volatile week shortened by the holidays.S&P 500 indexUp 1.45% this week,Dow JonesThe industrial average rose by 1.46%,Nasdaq Composite IndexUp 0.98%.
The Fed has said it expects to hike rates early this year and then hold them at their highs for a while, but the price of federal funds futures suggests rates will peak in the spring and then fall in the second. mid-year, a sign investors expect the Fed to change its stance In another sign, they expect Friday’s nonfarm payrolls report to send the Fed easing inflation.
However, the nonfarm payrolls report alone was not enough to change the Fed’s mind, with the market eyeing December’s Consumer Price Index (CPI) report as the next macroeconomic indicator that would provide the next step. of the Fed on monetary policy in February. More information for decision making. The market estimates that the annual growth rate of the CPI in December last year will decline from 7.1% in November last year to 6.5%.
A bad earnings season is coming
In addition to the economic data, US equities will usher in the start of the fourth quarter earnings season next Friday. JPMorgan Chase (JPM-USA), Bank of America (BAC-US), UnitedHealth Group (UNH-US), Delta Airlines (FROM-USA) and other major companies will be the first to announce their earnings.S&P 500 indexThe vast majority of constituent stocks will report results in the next month and a half.
At present, few people predict that companies will perform well in the fourth quarter of last year. Global,S&P 500 indexThe component companies are forecast to post their first quarterly loss since 2020. Earnings per share are expected to decline 2.2% annually to $53.87, according to IBES data from Refinitiv, compared with growth of about 4. 4% in the third quarter and 8.4% in the second quarter of last year. As 2022 progresses, consensus investor expectations for the fourth quarter have become more pessimistic, with analysts earlier last year forecasting a 14.1% annualized increase in fourth-quarter profits.
Wall Street analysts currently forecast it by 2022S&P 500 indexEarnings per share will reach $219.80, up 5.6% for the full year. The bottom line could be a little better, as most companies tend to beat consensus estimates, with analysts expecting annualized revenues to rise 4.1% to $3.7 trillion in the fourth quarter and increase ‘11.2% of revenue for the full year at $3.7. trillion last year, $13.8 trillion. Furthermore, the fact that sales are increasing but profits are declining suggests that corporate profit margins appear to have peaked this cycle.
Energy and industrials continue to enjoy the rebound
Falling earnings will not affect all companies equally. The energy and industrials sectors will be the exceptions, with earnings per share up 65% and 43% respectively year over year. These are all cycle-sensitive companies that have suffered the most during the COVID-19 pandemic and are still enjoying a rebound.
Conversely, the materials industry is expected to decline by 22% due to falling prices of many industrial inputs, and communications services are expected to decline by 21% due to projected declines in advertising spending and the streaming media business of many manufacturing companies. average. Consumer discretionary businesses tumble 15% on likely spending cuts this year.
to existS&P 500 indexTechnology stocks, which make up nearly a quarter of their constituents, are expected to post earnings declines of 9% in the fourth quarter of last year as wage costs soared at many software companies, corporate demand slowed and the semiconductor industry remained sluggish. Expectations are so low that fourth quarter results could be better than expected.
But these findings may not matter if the company doesn’t provide at least a decent outlook for 2023.
Inflation interferes with the performance of corporate earnings
According to data from Refinitiv, which brings together all the individual stocks and industry analystsS&P 500 indexThe average earnings forecast for component companies, with the bottom-up consensus forecasting earnings per share growth of 4.4% in 2023 to $229.52, compared to approximately $220 in 2022.
In contrast, Wall Street strategists polled by Barron’s in December believe 2023S&P 500 indexIncorporating earnings will decline 2.7% to an average of $214 per share.
The difference is in the profit margins. Strategists believe companies are being squeezed by rising wages and rising interest costs, despite the modest prices they charge to customers. This is largely in line with the Fed’s view that some elements of inflation are sticky and will take time and economic hardship to subside. If so, even if the Fed continues to hike rates, lower earnings forecasts could make the market look more expensive.
