First Signs of Recession Pain Seen in Earnings

(Bloomberg) — As investors note the prospect of peak inflation and the potential for a soft downturn, this earnings season will likely show there’s plenty to keep them up at night.

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The results are expected to mark the beginning of an income recession in the US that will last until the second half of 2023, according to strategists at Bloomberg Intelligence.

The consensus for corporate earnings in 2023 is “materially too high” with or without an economic downturn, according to Morgan Stanley’s Michael Wilson, who has warned that stocks could fall as much as 25%. remains. under pressure from weak first-quarter earnings and management.

Madison Faller, global strategist at JPMorgan Private Bank, expects management to make cautious comments given higher-than-normal inventory risks and wage pressures.

“With advanced economies slowing, we think Street estimates will continue to decline, but not immediately collapse,” Faller said. “Margin degradation is likely to continue through 2023 and will be a focus of management discussions with investors.”

JPMorgan Chase & Co., Citigroup Inc. and Wall Street banks including Bank of America Corp. have just started, the five key areas market participants will be watching this earnings season are:

Fed Pivot

While signals from earnings are important, investors are laser-focused on the Federal Reserve’s next moves. With US and European interest rates expected to peak by the summer, any comments on the impact of monetary policy are likely to be closely scrutinised. Investors will also want to see if firms can maintain low borrowing costs for years to come and avoid getting hurt by rising interest rates.

Against this backdrop, earnings estimates have been down for most of last year. Expectations for further cuts are still too high, according to strategists such as David Kostin of Goldman Sachs Group Inc., as the risk of recession, margin pressure and new corporate taxes outweigh upside risks such as China’s reopening.

“The data is increasingly pointing to a slowdown in activity across the board,” said James Athey, investment director at Abrdn. “Very few sectors now seem immune to the slowdown. “Realistically, I think we’re still in the early stages of the impact of Fed tightening.”

Consumer Spending

Slowing demand will be in focus this reporting season as a harbinger of recession. US economic data showed that consumers lost momentum in November amid higher interest rates and rising inflation. Americans are using savings and relying more on credit cards, raising questions about whether they can sustain economic growth through 2023.

Some companies have managed to ride these headwinds, at least so far. Nike Inc.’s quarterly sales beat Wall Street estimates amid increased holiday demand, and FedEx Corp.’s revenue beat analysts’ estimates due to price increases and cost-cutting. In Europe, Ryanair Holdings Plc, the region’s biggest discount airline, raised its full-year profit target after a stronger-than-expected Christmas travel period, with holiday sales at Tesco Plc and many other UK retailers rising.

Attempts have not been successful everywhere. Tesla Inc. delivered fewer cars than expected last quarter despite offering big incentives in its biggest markets, sending its shares tumbling. Macy’s Inc. also expects to report weaker-than-previously forecast fourth-quarter sales and sees continued consumer pressure in 2023.

Job Redundancies

Earnings reports will also be watched for further evidence of layoffs as companies react to the worsening backdrop. The phenomenon is most evident in the tech sector, where firms have been cutting jobs at a rapid pace since the early days of the pandemic, as Inc. and Salesforce Inc.’s recent announcements prove it. Meanwhile, Facebook owner Meta Platforms Inc., Apple Inc. ., and Alphabet Inc. slow or stop hiring, Taiwan Semiconductor Manufacturing Co. and preparing for weaker-than-expected sales by cutting costs.

In banking, Goldman Sachs, Morgan Stanley, Credit Suisse Group AG and Barclays Plc have either already laid off workers or announced plans to do so in the coming months. McDonald’s Corp. is cutting corporate jobs, the first restaurant chain in the U.S. to do so despite relatively strong sales performance in recent years.

“Many companies have become too big for a shrinking economy and a more challenging regulatory environment, and they really need to right-size,” said Marija Veitmane, chief strategist at State Street Global Markets. “The Importance of Viewing More Negative Earnings Guidance Currently Reflected in Consensus Estimates.”

Energy prices

The impact of lower electricity prices will be closely watched after WTI oil has fallen 35% from its March peak and gas in Europe has slipped amid milder weather. Exxon Mobil Corp., the largest oil company in the United States. has already said that the drop in crude oil and natural gas prices had a negative impact on the fourth quarter’s earnings.

According to Bloomberg Intelligence, US energy company profits are set for at least double-digit growth for the fourth straight quarter, but that could be after annual profit declines from the second quarter of 2023 to at least the first quarter of 2025.

Joachim Klement, head of strategy, accounting and sustainability at Liberum Capital, said: “The slowdown in global demand for energy commodities will weigh on the energy sector.

On the other hand, Clement noted that lower energy prices are “good news for sectors facing margin compression in 2021 and 2022. This is particularly evident in the consumer discretionary world.”

China Reopens

Comments from companies exposed to China’s revenue and spending will be scrutinized after the world’s second-largest economy fully reopens on Jan. 8. Mining, technology, and luxury firms in the U.S. and Europe get big sales from China, while cosmetics manufacturers get big sales from China. Tourism resources in Japan and Southeast Asia should also receive a boost.

However, the impact of China’s reopening on global earnings may be limited in the current quarter as Covid cases rise and many countries impose border restrictions on travelers from the country.

Elsewhere in corporate profits:

–With assistance from Ishika Mookerjee.

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