According to Barron’s (Barron’s) report, investors got the “Goldilocks” jobs report last Friday, the labor market grew but slowed down, the employment rate rose and wage growth slowed down, strengthening the soft landing of the US economy expectations. Yet when U.S. earnings season kicks off next week, few expect companies to perform well in the fourth quarter of last year.
Non-farm payrolls report boosts market sentiment
The report pointed out that if U.S. job growth can continue without exacerbating the wage-price spiral, it may not need to lead to cooling inflation through economic recession. The U.S. Federal Reserve (Fed) is likely to announce its victory over inflation and loosen monetary policy this year, triggering a rally across asset classes. The above is an optimistic view.
U.S. stocks closed higher on Friday, ending a volatile week that was shortened by the holiday. For the week, the S&P 500 rose 1.45%, the Dow Jones Industrial Average rose 1.46%, and the Nasdaq Composite rose 0.98%.
The Fed has said it plans to raise rates early this year and then keep rates at their peak for a while, yet pricing in fed funds futures suggests rates will peak in the spring and then cut in the second half of the year, a sign investors expect the Fed to change its stance In another sign, expect Friday’s non-farm payrolls report to convey cooling inflation to the Fed.
However, the non-farm payrolls report alone wasn’t enough to change the Fed’s mind, with the market looking to December’s Consumer Price Index (CPI) report as the next macroeconomic indicator that would provide the Fed’s next step in its February monetary policy stance. More information for decision making. The market estimates that the CPI annual growth rate in December last year will drop from 7.1% in November last year to 6.5%.
A Bad Earnings Season Is Coming
In addition to economic data, U.S. stocks will welcome the start of the fourth-quarter earnings season next Friday. JPMorgan Chase (JPM-US), Bank of America (BAC-US), UnitedHealth Group (UNH-US), Delta Air Lines (DAL-US) US) and other major companies will be the first to announce earnings. The vast majority of S&P 500 constituents 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. Overall, S&P 500 companies are expected to post their first quarterly loss since 2020. Earnings per share are expected to decline 2.2 percent annually to $53.87, according to IBES data from Refinitiv, compared with growth of about 4.4 percent in the third quarter and 8.4 percent in the second quarter of last year. As 2022 progresses, investors’ consensus expectations for the fourth quarter have become more pessimistic, with analysts early last year predicting a 14.1% annual increase in fourth-quarter profits.
Wall Street analysts are currently forecasting S&P 500 earnings per share of $219.80 in 2022, a 5.6% increase for the year. The end result could be a little better than that, as most companies tend to beat consensus estimates, with analysts forecasting a 4.1 percent annual increase in revenue to $3.7 trillion in the fourth quarter and an 11.2 percent increase for the full year last year to $3.7 trillion. $13.8 trillion. Also, the fact that sales are rising but earnings are falling suggests that corporate profit margins appear to have peaked this cycle.
Energy and industrials continue to enjoy rebound
Falling earnings won’t affect all companies equally. The energy and industrials sectors will be the exceptions, with earnings per share up 65% and 43%, respectively, from a year earlier. These are all cycle-sensitive companies that have suffered the most during the COVID-19 pandemic and are still enjoying a rebound.
Conversely, materials are expected to see revenue decline 22% due to lower prices for many industrial inputs, while communications services are expected to decline 21% due to lower expected advertising spending and the streaming business of many media companies. Continuing losses; consumer discretionary businesses slump 15% on likely lower spending this year.
Technology stocks, which make up nearly a quarter of the S&P 500, are forecast to slump 9 percent in fourth-quarter earnings as wage costs at many software companies soar, corporate demand slows and the semiconductor industry remains sluggish. state. Expectations are so low that fourth-quarter results could come in better than expected.
But those results may not matter if the company doesn’t at least provide a decent outlook for 2023.
Inflation interferes with corporate earnings performance
According to Refinitiv data, which brings together all individual stocks and industry analysts’ average earnings forecasts for S&P 500 companies, the bottom-up consensus is that earnings per share will grow 4.4% in 2023 to $229.52, up from 2022. Around $220 a year.
In contrast, Wall Street strategists polled by the Barron’s in December see S&P 500 earnings falling 2.7 percent to an average of $214 a share in 2023.
The difference is in profit margins. Strategists believe companies are being squeezed by rising wages and higher interest costs despite the modest prices they charge customers. This is largely in line with the Fed’s view that certain elements of inflation are sticky and will take time and economic pain to reduce. If that happens, even if the Fed continues to raise rates, lower earnings forecasts could make the market look more expensive.