The first quarter is ending and that means
earnings season is just around the corner. It’s one that will help the market
decide if it wants to head higher—or retest its 2022 lows.
Analysts predict that S&P
500 earnings per share will decline 4.6% in the first quarter
of 2023 compared with a year earlier, according to Refinitiv.
That would follow a 3.2% year-over-year decline in the fourth quarter.
The estimates have been coming down fast, with
many of the cuts prompted by cautious guidance from management teams early this
year. On Jan. 1, the consensus estimate was for 1.4% earnings per share growth
for the first quarter. Six months earlier it had been for 9.9% growth.
Revenues are forecast to continue growing—by
1.7% as of the latest consensus estimate from Refinitiv—but the trouble is with
profit margins. High inflation and a tight labor market are pushing costs up
faster than firms can raise prices.
As is often the case, it’s the implications
for the future that will really matter. Forecasts for later in 2023 stand to be
cut should first-quarter earnings season resemble the fourth quarter of 2022’s,
when the lowest percentage of S&P 500 companies beat profit estimates since
the depths of the Covid-19 pandemic. That could be a problem because the
current consensus calls for 10.6% year-over-year earnings-per-share growth
during the fourth quarter of 2023, down only slightly from the 10.8% growth
forecast back on Jan. 1.
The late-year earnings outlook stands in stark
contrast to economists’ forecasts for a second-half downturn. Simply put, stock
analysts appear too optimistic about the end of the year.
The longer those estimates remain high, the
bigger an issue they will become for investors, who are waiting for another
shoe to drop. “The sooner estimates get in line with the macro backdrop, the
sooner, and more likely, the market can reestablish an uptrend,” wrote Ed
Clissold, chief U.S. strategist at Ned
Davis Research. “If analysts kick the can down the road, it
increases the likelihood of negative surprises in the second half.”
The market’s rich valuation doesn’t leave much
room for error. The S&P 500 trades for about 17.5 times 2023’s consensus of
$221.40 in earnings per share, which would be up about 1.5% from 2022’s total.
That’s still a pricey multiple, one that could be at risk if estimates come
down.
Then again, investors may not care. The market
is always looking ahead to what comes next, and looking further ahead to 2024,
the picture is rosier. Analysts’ consensus estimate is for a record-high $247
in S&P 500 earnings per share next year. That would be up 14% from 2022's
final tally.
As we go through this year, the focus will
increasingly shift to that forecast, and investors could look past a 2023 dip
in earnings to better times ahead—unless analysts have 2024 wrong too.
There is one group of stocks that will have a
lot riding on first-quarter reports, probably more than others. That would be
the big banks that kick off the earnings season as usual, starting with JPMorgan
Chase, Wells Fargo, and Citigroup on
April 14. The scale of banks’ provisions for loan losses will be the key to
watch there. Those are non-cash charges but nonetheless weigh on reported
earnings, and they will send a signal about how banks expect the economy to
hold up in the months ahead. Investors will also want to hear from management
teams on the impact of the recent banking drama.
The upcoming results will be for the first quarter
of 2023. But it’s the third and fourth quarters that investors really need to
worry about.
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