Earnings season started to pick up the pace last week, with 26 S&P 500 companies reporting. Banks and financial companies remained a healthy share of the total. The S&P 500 fell by almost -0.7% for the week. December retail sales gave rise to recession fears, and earnings were generally worse than expected. According to FactSet, 67% of companies have exceeded earnings estimates, below the 10-year average of 73%. This week starts the heart of the earnings season, with 89 S&P 500 companies scheduled to report.
At this early juncture, blended earnings, which combine actual with estimates of companies yet to report, are lower than forecasts at the end of the quarter and deteriorated last week. The high earnings growth rate for the industrials remains misleading since the airlines reported a loss in the fourth quarter of 2021 and should post a profit this quarter. Only one sector, consumer staples, is expected to post higher earnings than forecast on December 30th. The energy sector retains the crown with the highest expected growth rate driven by increased energy prices, with expected earnings slated to increase by 59% year-over-year. On a related note, Berkshire Hathaway BRK.B continued to buy shares of Occidental Petroleum OXY (OXY) in 2022 and now owns over 20% of the company. A previous piece discussed why Warren Buffett’s Berkshire Hathaway could be adding to its holdings in Occidental Petroleum.
The blended revenues paint a similar picture, with only real estate and consumer staples having better estimates than at the end of the quarter. Sales in the energy sector illustrate the robust increase in energy commodity prices.
So far, the blended earnings performance has underperformed expectations at the end of the quarter. Combining actual results with consensus estimates for companies yet to report, the blended earnings growth rate for the quarter weakened to -4.6% year-over-year, below the expectation of -3.2% at the end of the quarter. Expected earnings growth for the calendar year 2023 declined this week.
Thanks to worse-than-expected earnings from Goldman Sachs (GS) and Allstate ALL (ALL), the financial sector was the most significant contributor behind the decline in blended earnings for the S&P 500. Netflix NFLX (NFLX) rallied sharply on subscriber growth , but earnings were well below expectations which dented the blended earnings for the communications services sector. This week has some bellwethers reporting results, including Microsoft MSFT (MSFT) and Tesla (TSLA).
Outside of earnings season, stocks were depressed by worse-than-expected December retail sales last week. This deceleration in consumer spending raised the specter of an economic hard landing in 2023. This week brings the first reading for US fourth-quarter economic growth on Thursday. While this data is firmly in the rearview mirror, investors will look for clues about the economy’s path. Despite the Atlanta Fed’s economic model expecting an acceleration in growth over the 3.2% pace in the third quarter, most economists expect a deceleration to a mid-2% growth rate in the fourth quarter. Recent data, including retail sales, seems to indicate slowing economic growth.
Headline earnings deteriorated last week and remained below estimates at the end of the quarter. This week starts the heart of earnings season with financials no longer a dominant force in the results, so it will be instructive to see if the earnings can make up some ground. As discussed previously, margin pressures, inflation, and the strong dollar remain headwinds for the fourth quarter earnings season. Markets should remain particularly sensitive to forward guidance from companies while the threat of recession in 2023 looms.