US corporate earnings season to date – A mixed bag, but Energy is the outlier
Through to 10 Feb, 344 companies in the S&P 500 Index have reported earnings for Q4 2022. Of these companies, 69% reported earnings above analyst expectations and 27% reported earnings below. In a typical quarter, 66% of companies beat estimates, and 20% miss estimates. Over the past four quarters, 76% of companies beat the estimates and 21% missed estimates.
In aggregate, companies are reporting earnings that are just +1.6% above estimates, which compares to a long-term average surprise factor of +4.1% and the average surprise factor over the prior four quarters of +5.3%. The estimated earnings growth rate for the S&P 500 for 22Q4 is -2.8%. If the energy sector is excluded, the growth rate declines to -7.1%. The estimated revenue growth rate for the S&P 500 for 22Q4 is +5.0%. If the energy sector is excluded, the growth rate declines to +4.1%.
Corporates are expressing mixed views about prospects, particularly the outlook for domestic and international economic growth. Secondly, margins continued to face pressure from elevated input costs, but companies were better prepared to face these challenges than in previous quarters. Third, while economic data point to a strong US labour market, management remains mixed between focusing on signs of softness and continued strength. And fourth, management teams are discussing potential impacts from legislative provisions included in the US Inflation Reduction Act and other potential changes in the regulatory environment.
What are US analysts saying about stocks?
Goldman Sachs: “Markets continued to weigh a strong January jobs report against signs that disinflation is well underway. The resilient labour market coupled with signs of improvement in business surveys led our economists to cut their subjective probability that the US economy will enter a recession in the next 12 months to 25% from 35%. Similarly, the improvement in macro data led us to lift our 3-month S&P 500 target to 4000 (from 3600) last week.”
JPMorgan: “We believe that the equity rally that started last October, and that we hoped would be driven by peaking bond yields/CPI, China reopening, and the fall in European gas prices, is unlikely to get the fundamental confirmation for the next leg higher as the year progresses. Once the positioning recovers, Q1 is in our view likely to mark the high point of the market. With this in mind, we think that one should be using the ytd gains in order to cut equity allocation, and to reduce the beta of a portfolio, taking advantage of the very weak Defensives performance since last summer.”
Morgan Stanley: “Price action is not reflective of the deteriorating fundamentals or the fact that the Fed is hiking during an earnings recession —drivers that should ultimately determine the lows for this bear market later this spring… With equity markets showing some real signs of exhaustion last week, we think the risk-reward is as poor as it’s been at any time during this bear market.”
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