Dour earnings loom over Wall St. as a sluggish economy bites

As the nation’s biggest firms prepare to report their results earlier this year — providing a glimpse into how the economy is resonating with the banking shock — they’re already warning investors to brace themselves.

For the big businesses that make up the S&P 500 index, Wall Street forecasters expect profits to fall nearly 7 percent in the first three months of 2023, according to estimates compiled by FactSet. It was the second consecutive quarterly decline, and the biggest since a sharp — albeit brief — decline in the early days of the coronavirus pandemic in 2020.

The forecast indicates a rapid decline in forecasts. At the start of the year, the consensus was that profits would be roughly flat in the first quarter of 2022. But since then, persistent worries about inflation and the implosion in the banking sector in March have worsened the outlook.

Businesses told investors to lower their expectations as 78 companies in the S&P 500 gave guidance on results that fell short of the average Wall Street estimate. It’s true that corporate executives often manage expectations so they can give investors a pleasant shock rather than a bad one, but such underpredictions are rarely so widespread that they may have more at this point, said Ron Temple, chief market strategist. In Lazard.

“We’re going to be disappointed rather than surprised,” he said.

The first group to report results is the industry investors are most interested in. Major banks including JPMorgan Chase, Citigroup and Wells Fargo will release their results on Friday, the first formal update for the industry since the collapse of the Silicon Valley bank last month.

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Investors and analysts note that the full impact of March’s turmoil is likely to be felt soon, as it comes so close to the end of the quarter. Instead, the focus will be on the views of bank chief executives and chief financial officers on what they’ve seen recently and what to expect – both for the banks and the economy.

“It’s more about commentary and tone,” Mr. Temple said.

A key question on investors’ minds is how many customers have shifted their deposits from smaller regional lenders to larger lenders, and what financial measures smaller competitors have been forced to take to stay afloat.

There are already signs that banks have pulled back from lending, and a weakening economy could put pressure on other companies that need cash.

“These CFOs need to be better prepared to get a third degree and provide details about how they’re coping and how things are going down the road,” said Michael Kushma, chief investment officer for broad market fixed income at Morgan Stanley Investment Management.

As inflation picked up last year, consumers were willing to pay higher prices sent by companies facing higher costs. As a result, corporate profit margins increased in 2022, to the highest level since 2008.

The Federal Reserve raised interest rates in the first quarter, adding costs to firms and consumers. But companies find it difficult to raise prices for their customers.

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For companies in the S&P 500, net profit margin, or the percentage of a company’s revenue that ends up as profit, will fall to its lowest level since the end of 2020, data from FactSet shows.

If firms cannot easily pass costs, they are likely to become more conservative in their decision-making, holding back on spending and laying off workers, slowing the economy.

“At a time when economic activity has slowed down, we’ve lived with higher-than-normal interest rates for another three months. What’s the result?” James Masserio, co-president of Americas equity at Societe Generale, said: “It’s going to be front and center for people.”

While the high expectation is that profits will decline, views for different sectors of the stock market vary widely.

According to FactSet data, commodities companies, such as mining industries and materials manufacturers, are expected to see their earnings fall by a third from the start of 2022 as fears of a slowdown in global growth dampen demand for a row. Materials like copper and aluminum.

Telecom and technology companies are also expected to report a sharp decline in revenue. At the other end of the spectrum, major oil producers such as ExxonMobil and Chevron are expected to post double-digit earnings growth in the fifth quarter, while industrials are expected to post double-digit earnings growth in the eighth quarter.

Delta Air Lines, one of the first major companies to report earnings, reflected a mixed outlook on its own results. Company said Thursday That fell short of forecasts for sales and profit in the first quarter. But due to “record bookings for summer”, it issued a good forecast for growth in the second quarter.

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Despite the bleak outlook, stock prices remain buoyant. The S&P 500 has moved sideways so far in April, but is up 7 percent for the year.

To some extent, this reflects the index’s upside makeup, with Apple, Microsoft and a handful of other companies with huge caps, meaning gains in their share prices can propel the index even as other companies falter.

The Russell 2000 index of small U.S. companies, the most vulnerable to economic downturns, is lower this month, but the index also remains positive for the year.

Some analysts and bankers said many investors have spent recent months bracing for more turbulent times and are already positioning themselves for bad news. This will help support market prices even in the face of weak earnings reports.

That is the optimistic outlook. The counterargument is that — despite dire forecasts about the economy and last year’s corporate profits — investors don’t face a meaningful downturn. New data may change that.

“It’s a big piece of the puzzle that we’re missing,” Mr. Masserio said.

Rob Copeland Contributed report.

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