Earnings season moved to the center of the schedule last week with 89 S&P 500 companies reporting earnings. The S&P 500 is up almost 2.5% in his week, despite worsening overall earnings conditions. Stronger-than-expected GDP growth in the fourth quarter has raised hopes of avoiding a recession in 2023. According to FactSet, 69% of companies beat their profit expectations, below the 10-year average of 73%. With 109 of his S&P 500 companies scheduled to report earnings this week, it’s the busiest week of earnings season.
Mixed earnings, which combine actuals and not-yet-reported company estimates, fell short of end-of-quarter forecasts and deteriorated again last week. High earnings growth in the industrial sector remains misleading as airlines should report losses in the fourth quarter of 2021 and post profits this quarter. , forecasts improved in some sectors last week. Four sectors – consumer staples, real estate, healthcare and materials – are expected to record higher returns than the December 30 forecast. The energy sector is expected to have the highest growth rate, driven by higher energy prices, and remains the leader in revenue, which is expected to grow by 59% year-on-year.Relatedly, Berkshire Hathaway
Compared to earnings, blended earnings improved last week and are now in line with quarter-end levels. Industrials, real estate, consumer staples, health care and materials had better estimates than at the end of the quarter. Energy segment sales show solid gains in energy commodity prices.
So far, mixed earnings performance has been below quarter-end expectations. Combining actual results for companies that have yet to report with consensus forecasts, quarter-on-quarter mixed revenue growth fell to -5.0% year-over-year, below the quarter-end forecast of -3.2%. Expected earnings growth for the 2023 calendar year has declined again this week.
Financials and industrials were the biggest contributors to the decline in the S&P 500’s mixed returns.
Outside of earnings season, hopes for US economic growth have risen as GDP growth hit 2.9% in Q4 2022, a better-than-expected rate. It will be on a gradual trajectory in early 2023 for a while. Higher-than-expected inventory growth adds to downside risks to Q1 GDP growth. Net exports have also boosted his GDP growth more than expected, and this tailwind is unlikely to continue.
Another way to look at GDP data is real final sales to domestic retail buyers. According to the Federal Reserve Bank of Richmond, actual terminal sales to individual domestic purchasers can be defined as “the demand of individuals in the domestic economy, the sum of consumer spending and private capital investment.” In other words, this measure excludes the effects of trade, inventories, and government spending, making it a good measure of US private sector activity. On this measure, the economy performed worse than the headline GDP figures suggest. The report was essentially the opposite of his 1st and 2nd quarter of 2022, when GDP declined, with some arguing that a recession had begun. Yet private sector economic growth continues, which runs counter to that view. Recent data, including retail sales and durable goods orders, point to slowing economic growth.
The Federal Reserve will meet on Wednesday and is almost certain to raise short-term interest rates by 25 basis points (0.25%). This outcome may not be as compelling as Powell’s comments, as market participants are keen on the path of further rate hikes to gauge the likelihood that the fight against inflation will end in a recession. Apart from that, monthly employment reports arrive on Friday. Details from the fourth-quarter GDP report point to a more pessimistic outlook for the economy in 2023, but continued resilience in the labor market combined with consumer well-being should help optimists can provide a reasonably strong argument that the economy could be free of this soft spot.
This week marks the beginning of the busiest week of earnings season. Headline earnings deteriorated again last week and remained below expectations at the end of the quarter. With the threat of a 2023 recession looming, companies will continue to be particularly sensitive to forward guidance from companies. The Fed is almost certain to raise interest rates, but it will be interesting to see what happens next. The monthly jobs report adds to the mix of data as the market tries to predict his 2023 recession chances.