Despite two-thirds of American companies beating profit forecasts, traders on Wall Street have deep concerns about this results season. Our City writer explains.
Investors will be looking to the likes of Apple Inc (NASDAQ:AAPL) and Ford Motor Co (NYSE:F) to lift spirits after a “subpar” performance by S&P 500 companies so far in the fourth-quarter earnings season.
Based on filings by around a third of constituents in the leading US benchmark, FactSet noted that 69% had delivered earnings per share (EPS) figures above estimates.
That’s below the five-year average of 77% and the 10-year average of 73%, with the scale of the earnings beat of 1.5% significantly below recent trends seen in the last decade.
FactSet said a result of 1.5% would be the second-lowest surprise percentage reported by the index since the third quarter of 2012, trailing only the pandemic-hit first quarter of 2020.
The overall performance keeps the S&P 500 on track to record an earnings decline of 5%, the first year-on-year fall since the third quarter of 2020.
FactSet said: “The Q4 earnings season for the S&P 500 continues to be subpar. While the number of S&P 500 companies reporting positive earnings surprises increased over the past week, the magnitude of these earnings surprises decreased during this time.”
The results season hits top gear this week as about 35% of the S&P 500 is due to report, including this afternoon’s heavyweight earnings from McDonald's Corp (NYSE:MCD), Exxon Mobil Corp (NYSE:XOM) and General Motors Co (NYSE:GM).
And after Thursday’s closing bell, investors will hear from tech giants Apple, Amazon.com Inc (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOGL) in updates accounting for 12% of the S&P 500 by market capitalisation.
Many big players from the sector have already announced moves to cut labour costs in preparation for the economic downturn and as digital spending starts to slow.
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Google owner Alphabet recently unveiled plans to cut around 12,000 jobs, or 6% of its workforce, days after Microsoft Corp (NASDAQ:MSFT) said it intended to lay off 10,000 workers, or almost 5% of its staff. Amazon cut 18,000 jobs a few days earlier, with others reducing staff levels including Facebook’s parent company Meta (NASDAQ:META) and Twitter after Elon Musk’s takeover.
However, Bank of America said yesterday that it believed the tech sector may have to go further. It noted that a three-year hiring spree had driven 80% growth in employee numbers, whereas real sales only lifted 60% over the same period and that these figures were before any slowdown in demand.
The bank said: “Cost cutting so far of 1.7% of sales should help bolster margin compression, but sales have historically been a bigger driver of margins. Weakening demand and negative operating leverage argues for continued margin pressure.”
Despite the layoffs and lacklustre earning season, the S&P 500 is up by around 5% so far this year as sentiment is boosted by the US Federal Reserve being close to its peak for interest rates. The bank is expected to slow the pace of rate hikes to 0.25% at its meeting tomorrow.
However, Bank of America said guidance from corporate America remains weak. It notes that 2023 consensus estimates have been cut by 10% since June, led by the communication services and consumer discretionary sectors. Only the energy and utilities sectors have seen upward revisions.
It said: “Extrapolating from the current revision trend translates to 4% downside to 2023 EPS from the current level, implying $219. But we expect earnings to decelerate further and forecast $200 in EPS, down 9% year-on-year.”
The bank points out that during the prior four recessions in 1990, 2001, 2007 and 2020, forward EPS estimates were revised down by about 19% on average during recessions versus just 2% heading into a recession.
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