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The key points are:
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We’re off to a good start for the fourth quarter of 2022 season, but there’s still no sign of an impending earnings cliff that will force management to backtrack overwhelmingly. That said, companies appear to be struggling to beat consensus estimates, suggesting estimates likely didn’t come down enough.
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Looking at the full fourth quarter of 2022, the S&P 500 total earnings are now expected to grow +4.0% in earnings and decline -7.2%. Excluding the strong contribution of the energy sector, Q4 earnings for the rest of the index are expected to decline -11.3% on +3.1% earnings growth.
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Full-year 2023 earnings forecasts are similarly down. From its peak in mid-April 2022, the annual aggregate has been reduced by -10% across the index and -12.2% excluding the contribution of the energy sector.
The fourth quarter earnings season is off to a good start, with very strong bank net interest income offsetting the expected investment banking weakness.
JP Morgan net interest income increased +48% (JPM), management commentary suggested that this revenue stream may have peaked.BACs) and Wells Fargo (WFCMore) rose by +29% and +45%, respectively.
Comparing year-on-year returns for each of these companies, JP Morgan increased +5.9%, Bank of America increased +1.7%, and Citigroup and Wells Fargo decreased -43.3% and -50.2%, respectively – Primarily a function of the difference in how reserves or loan loss reserves performed in the two periods.
All of these banks, while releasing reserved reserves at the beginning of the year, have reserved loan loss reserves in light of the upcoming economic weakness.
Looking at these early fourth quarter results, the big question surrounding the earnings season this quarter is not the quarterly earnings growth or the percentage of S&P 500 members who end up exceeding consensus expectations, but rather these results and Associated management commentary and guidance inform the evolution of our 2023 earnings outlook.
Market fears put earnings on the brink due to the combined effects of softening demand from exceptional Fed tightening and sustained cost pressures prompting management across many industries to offer pessimistic guidance It means that it may be in the middle of the day.
Please note that this is not a new horror. Similar actions were taken before the start of the last reporting cycle (Q3 2022), but the concerns seem to be somewhat more widespread this time around.
Related to this concern is the view that current earnings projections remain high and need to be lowered significantly to match the reality of the unfolding economic conditions.
While we do not agree with this view, we believe that this situation will only unfold against the backdrop of a “hard landing” for the US economy. We believe the risk of such a ‘hard landing’ increases if the Fed continues to tighten policy beyond what the market has already priced in. Our earnings outlook is even more optimistic given how much lower estimates have already come.
The chart below shows the evolution of the total revenue forecast from early 2022 to 2023.
Image Source: Sachs Investment Research
As previously mentioned, the index’s current total total return is down from $242.98 in mid-April 2022, close to the index ‘EPS’ level of $220.56. The chart below tracks these index “EPS” values from early 2022. Please note that these “EPS” values are estimated approximations and were previously published as of the dates indicated in the chart below.
Image Source: Sachs Investment Research
Overall picture of earnings
The chart below provides an overview of quarterly earnings. The fourth quarter growth is on a mixed basis, combining actual reports released with company estimates going forward.
Image Source: Sachs Investment Research
The chart below shows the overall earnings situation on an annual basis where growth momentum is expected to continue.
Image Source: Sachs Investment Research
As you can see, revenue is expected to grow by only +1.7% next year. Growth of this magnitude is far from synchronous, with economic growth prospects flattening or even slightly declining. Remember, the headline GDP growth is in real or inflation-adjusted numbers, although the S&P 500 returns we’re talking about here aren’t.
As I mentioned earlier, the 2023 total profit ex-Energy forecast is already down almost -12% from mid-April. Presumably, the estimates will be revised down a bit more in the coming weeks after the fourth quarter reporting cycle actually kicks off. But nevertheless, we have already covered some grounds for bringing our estimates to a fair or appropriate level.
This is especially true if the upcoming recession turns out to be more of a garden change than the events of the last two. Recent biases have forced us to use the last two recessions, one of the most troubling in recent history, as a reference point. Yes, and its natural tendencies need attention.
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