First Signs of Recession Pain Look Set to Emerge from Earnings

(Bloomberg) — As investors celebrate the prospect of higher inflation and the possibility of a soft landing, this earnings season may show there’s still plenty to tide them over.

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As costs continue to rise, interest rates begin to bite and consumer spending declines, the results are expected to indicate the beginning of a slowdown in US income, which will last until the second half of 2023, according to Bloomberg Intelligence strategists.

While analysts have been busy cutting their forecasts in the past few weeks, the company’s 2023 earnings consensus remains “materially high” even without a recession, according to Morgan Stanley’s Michael Wilson, who warns that the stock could fall as much as 25% in the first quarter under pressure from low wages and and guidelines.

Madison Faller, global strategist at JPMorgan Private Bank, expects management to provide more cautious comments given the risks of a recession, higher than normal inventories and wage pressures.

“With the slowdown in the developed economy, we think the Street forecast will continue to decline, but not collapse immediately,” Faller said. “The lowering of the limit will continue through 2023 and will be a key issue in the management’s discussions with investors.”

With Wall Street banks including JPMorgan Chase & Co., Citigroup Inc. and Bank of America Corp. just to kick things off, here are five key areas that market participants will be watching this earnings season:

The Fed Pivot

While signals from earnings are important, investors’ attention is laser-focused on the Federal Reserve’s next move. And with US and European interest rates expected to rise this summer, any comments on the impact of monetary policy are likely to be closely scrutinized. Investors will also be interested to learn whether firms have been able to secure low borrowing costs for years to come and avoid feeling trapped by rising interest rates.

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In contrast to the latter, earnings estimates have declined for most of the past year. However, they are still very high, according to experts such as Goldman Sachs Group Inc. of David Kostin, who expects further cuts as the risk of a recession, border pressures and new business taxes outweigh risks such as China’s reopening.

“The data is 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. In fact, I think we are still in the early stages of the impact of Fed tightening. “

Disposing of the Customer

Slowing demand will be highlighted in this reporting period as a precursor to recession. US economic data showed consumers lost momentum in November amid higher interest rates and rising prices. Americans are trying to save and rely more on credit cards, raising the question of whether they will be able to continue driving economic growth in 2023.

Some companies have managed to navigate these storms, at least for now. Nike Inc.’s quarterly sales beat Wall Street estimates amid high demand during the holiday season and FedEx Corp.’s earnings. beat analysts’ estimates due to higher prices and lower costs. In Europe, Ryanair Holdings Plc, the region’s biggest discount airline, raised its full-year profit after a stronger-than-expected Christmas travel season, while holiday sales rose at Tesco Plc and many other UK retailers.

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Efforts have not been universally successful. Tesla Inc. delivered fewer vehicles than expected last quarter despite heavy incentives in its major markets, sending its shares tumbling. Macy’s Inc. it also expects to report fourth-quarter sales that were weaker than previously estimated, and sees continued consumer pressure in 2023.

Work Reduction

Earnings reports will also be watched for further evidence of layoffs as companies react to the negative backdrop. This issue is most pronounced in technology, where firms are cutting jobs at a rate close to the first days of the pandemic, as evidenced by recent announcements from Inc. and Salesforce Inc. Meanwhile, Facebook owner Meta Platforms Inc., Apple Inc. ., and Alphabet Inc. all are slowing or suspending hiring, while Taiwan Semiconductor Manufacturing Co. looking for weaker-than-expected sales by cutting spending.

Within the banking space, Goldman Sachs, Morgan Stanley, Credit Suisse Group AG and Barclays Plc have all either already laid off staff or announced plans to do so in the coming months. McDonald’s Corp. is cutting back on business operations, the first restaurant chain in the US to do so despite strong sales in recent years.

“Many companies have become very large in a sluggish economy and a more difficult regulatory environment, and in fact they are in great need of proper valuation,” said Marija Veitmane, senior analyst at State Street Global Markets, stressing that “the importance of looking at the direction of earnings, which could be very negative, is currently being demonstrated it’s a consensus estimate.”

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Power Prices

The impact of falling energy prices will be closely watched after WTI oil fell more than 35% from its March peak and gas production in Europe slipped amid milder weather – the biggest swing in output in just six months. Exxon Mobil Corp., the largest US oil company, has said that lower crude and natural gas prices had a negative impact on fourth-quarter earnings.

US energy firms’ earnings are set for a fourth consecutive quarter of at least double-digit growth, but could send annual earnings down from the second quarter of 2023 to the first quarter of 2025, according to Bloomberg Intelligence.

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

On the other hand, Klement noted that low energy prices are “good news for sectors that have experienced difficulties in 2021 and 2022. This is even more pronounced in a world of consumer choice.”

China Reopening

Statements from companies on profits and exposure to costs in China will be closely watched, after the world’s second-largest economy fully reopened in January. Japan and tourism stocks across Southeast Asia should also be boosted.

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

Elsewhere in business income:

–Courtesy of Ishika Mookerjee.

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