Dour Earnings Loom Over Wall St. as a Slowing Economy Bites

As the country’s biggest companies prepare to report first-year earnings, they offer some perspective on how the economy is faring as the bank shock reverberates. warns you to be careful

For the large companies that make up the S&P 500 index, Wall Street forecasters expect earnings to fall about 7% in the first three months of 2023, according to estimates gathered by FactSet. . This is his second consecutive quarterly decline and the biggest drop since the severe (albeit short) drop early in the 2020 coronavirus pandemic.

The forecast shows a rapid deterioration of the forecast. At the beginning of the year, the consensus was that earnings would be roughly on par with the first quarter of 2022. Since then, however, inflation concerns have persisted, and then a resurgence in the banking sector in March dampened the outlook.

Companies are also telling investors to lower their expectations, with 78 companies in the S&P 500 offering guidance on underperforming average Wall Street estimates. While it’s true that company management can often control expectations to give investors a pleasant surprise rather than a nasty shock, such low expectations are seldom so widespread, and this time around. Suggesting that more could happen…at Lazard.

“You’re likely to be more disappointed than you expected,” he said.

The first group to report results is the industry that happens to be what investors want to hear about. Major banks including JPMorgan Chase, Citigroup and Wells Fargo are set to release the industry’s first formal updates on Friday since the Silicon Valley Bank collapse last month.

Investors and analysts say it is likely too early to fully grasp the impact of the March turmoil, given that it was nearing the end of the quarter. Instead, we look at comments from bank chief executives and chief financial officers on what we’ve seen recently and what to expect for both banks and the economy.

“Comments and tone will be important,” Temple said.

A key question on the minds of investors is how many customers have moved their deposits from smaller regional lenders to the largest lenders and what financial measures smaller competitors will take to survive. I mean, was it forced?

There are already signs that banks are pulling back from lending, which could put pressure on other businesses in need of cash as the economy weakens.

“These CFOs are going through their third degree and how they are coping,” said Michael Kushma, chief investment officer for Broad Market Fixed Income at Morgan Stanley Investment Management. Better be prepared to go into detail about what it looks like in the future,” he said.

Inflation soared last year, making consumers willing to pay higher prices offered by companies facing rising costs. As a result, corporate profit margins have risen in 2022, reaching their highest level since 2008.

The Federal Reserve continued to raise interest rates in the first quarter, increasing costs to businesses and consumers. However, businesses are finding it increasingly difficult to keep increasing prices for their customers.

S&P 500 companies’ net profit margins, or the percentage of their earnings that end up in the black, are expected to fall to their lowest levels since the end of 2020, according to FactSet data.

If businesses cannot easily pass on costs, they are likely to become more conservative in decision-making, likely to cut back on spending and lay off employees, which could slow the economy.

“During a period of slowing economic activity, we have been living at higher than normal interest rates for another three months. What effect did that have?” Societe Generale Americas Equities Co-Director James Masserio said: “It will be front and center for people.”

The overall expectation is lower profitability, but the outlook for different sectors of the stock market is very different.

Materials companies such as mining and commodity makers are expected to see their revenues fall by about a third from the beginning of 2022, according to FactSet data. Commodities such as copper and aluminum.

Telecommunications and technology companies are also expected to report sharp declines in revenue. At the other end of the spectrum, major oil producers such as ExxonMobil and Chevron reported his fifth consecutive quarter of double-digit earnings growth, while industrial companies posted their eighth consecutive quarter of earnings growth, boosting global demand. is expected to offset the decline in prices.

Stocks continue to perform well despite the worsening outlook. The S&P 500 has held him flat so far in April, but for the year he’s up 7%.

To some extent, this reflects the skewed composition of the index, where stock price gains for the behemoths of Apple, Microsoft, and a handful of other companies can support the index even when others struggle. It means that there is

Even though the Russell 2000 index of recession-prone US small businesses has edged lower this month, it remains positive this year.

Many investors have been gearing up in recent months for more difficult times ahead and are already bracing for bad news, according to some analysts and bankers. This could help support market prices despite a string of weak earnings reports.

That’s the optimistic outlook. The counter-argument is that despite dismal forecasts for the economy and corporate earnings last year, investors didn’t have to face a meaningful downturn. New data could change that.

“What we miss is the big piece of the puzzle,” said Masserio.

Rob Copeland contributed to the report.

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