Forget inflation, it’s all about profits

New York

Everything has a season and now is the time of profit.

Over the past few weeks, investors have focused on inflation and Fed policy, but now market reactions are bigger to earnings (especially misses) and smaller to economic data.

What is happening: “We expect earnings to move into the main phase ahead,” Bank of America strategists Savita Subramanian and Ohsung Kwon said in a note on Friday. They noted that over the past three quarters, the S&P 500’s reactions to earnings increases and releases have grown higher and now exceed the one-day market reaction to both CPI inflation and Fed policy meeting decisions.

Companies that missed both sales and earnings per share during the latest quarter underperformed the S&P 500 by an average of six percentage points the next day, the biggest reaction to a record number of earnings misses.

Disney shares fell 13.16% last November, the lowest level in more than two years. Shares of Meta fell 24% in October after reporting a third-quarter revenue decline, the company’s second consecutive quarterly revenue decline. Shares of Palantir closed up more than 11% in November after slightly missing estimates.

“We see this as a shift in the market from the Fed and inflation to earnings: while reactions to earnings increase, reactions to inflation data and FOMC meetings started to get smaller and smaller,” wrote Subramanian and Kwon.

So, we can expect significant volatility over the next few weeks as companies report their fourth quarter corporate earnings.

Bank of America’s predictive analytics team analyzed earnings transcripts to calculate sentiment scores and found that corporate sentiment remained stable. the third quarter, reached an all-time high, indicating potential earnings declines in the future.

As well as companies references to better business conditions (specific use of the words “better” or “stronger” or “worse” or “weaker”) remained well below the historical average, and mentions of optimism fell from the first quarter of the year has fallen to its lowest level since. 2020.

Until now, the swings have been in the negative direction. S&P 500 fourth-quarter earnings per share estimates have fallen nearly 7% since October. Early earnings reports from some of the biggest financial institutions point to gloomy quarters.

Bad news ahead: According to FactSet analysis, the estimated earnings decline for the S&P 500 in the fourth quarter of 2022 is -3.9%. If it is indeed real The drop would mark the first earnings decline reported by the index since the third quarter of 2020.

Over the past few weeks, earnings expectations for the first and second quarters of 2023 have shifted from year-over-year growth to year-over-year declines, according to FactSet.

Latest: JPMorgan beat estimates for fourth-quarter earnings, while raising the amount it charges for expected loan defaults. The bank added $2.3 billion in loan loss provisions in the quarter, a 49% increase over the third quarter.

The move “reflects a slight deterioration in the firm’s macroeconomic outlook, now a mild recession at the core,” the report said. In a subsequent call, JPMorgan CFO Jeremy Barnum told reporters from the bank It expects a recession in the fourth quarter of 2023.

Bank of America (BAC) also beat earnings Despite expectations, CEO Brian Moynihan said Friday the bank is bracing for rising unemployment and a recession in 2023. “Our base case scenario assumes a mild recession,” he said. The bank added $1.1 billion in loan loss provisions, a sharp turnaround from when the number was negative last year.

What’s next: Hang on to your hats. Over the coming week, 26 S&P 500 companies are scheduled to report fourth-quarter results.

Apple CEO Tim Cook has recommended the company take a pay cut this year in response to angry shareholders, my colleague Anna Cooban reports.

Cook was paid $99.4 million last year. The vast majority of his 2022 compensation — about 75% — was tied to company stock, half of which was tied to stock price performance.

But after Apple’s stock fell nearly 27% last year, shareholders voted against Cook’s pay package. The vote is not binding, but the board’s compensation committee said Cook himself demanded a reduction.

“The compensation committee balanced shareholder feedback, Apple’s exceptional performance, and a recommendation to adjust Mr. Cook’s compensation based on the feedback received,” the company said in its annual proxy statement released Thursday.

But don’t cry for Tim Cook just yet. This year, the target of the executive’s share award is 40 million dollars. About $30 million of that, or three-quarters, is tied to stock price performance. The tech mogul, who has led Apple ( AAPL ) since 2011, is estimated to be worth $1.7 billion, according to Forbes.

Bottom line: Like other tech companies, Apple’s stock price fell last year due to the closure of some of its factories in China. Supply chain bottlenecks and fears that a global economic slowdown will dampen demand also weighed on stocks.

Angry investors believe the person at the helm of the company should also see a pay cut.

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