According to Barron’s (Barron’s) report, investors got the “Goldilocks” employment 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.S&P 500 IndexUp 1.45% this week,Dow JonesThe industrial average rose 1.46%,Nasdaq Composite IndexUp 0.98%.
The Fed has said it plans to raise rates early this year and then keep rates at their peak for a while, but pricing in fed funds futures suggests that rates will peak in the spring and then cut in the second half of the year, a sign investors expect the Fed will 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 on monetary policy in February. 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 usher in the start of the fourth-quarter earnings season next Friday. JPMorgan Chase (JPM-US),Bank of America (BAC-US), UnitedHealth Group (UNH-US),Delta Airlines (DAL-US) and other big 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. Overall,S&P 500 IndexComponent 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 regarding 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 currently forecast that by 2022S&P 500 IndexEarnings per share will reach $219.80, up 5.6% for the full year. The end result might 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 in revenue for the full year to $3.7 trillion last year. $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.
In contrast, the materials industry is expected to decline 22% as the prices of many industrial inputs fall, and the communication services will decline 21% due to the expected decline in spending and the streaming media business of many media companies. Continuing losses; consumer discretionary businesses slump 15% on likely lower spending this year.
existS&P 500 IndexTechnology stocks, which make up nearly a quarter of their constituents, are forecast to see a 9 percent drop in earnings for the fourth quarter of last year as wage costs rose sharply at many software companies, corporate demand slowed and the semiconductor industry remained sluggish. Expectations are so low that fourth-quarter results might 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 toS&P 500 IndexThe average earnings forecast for component companies, with the bottom-up consensus calling for earnings per share growth of 4.4% in 2023 to $229.52, up from around $220 in 2022.
In contrast, Wall Street strategists surveyed by the Barron’s in December believe that 2023S&P 500 IndexConstituent profit will fall 2.7 percent to an average of $214 a share.
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 might make the market look more expensive.