Key earnings season themes to affect corporate outlook – Stock Market News
May 16, 2023 3:25 pm
As the Q1 earnings season draws to an end, investors are closely scrutinising companies’ financial results to assess the health of the US economy and whether consumer spending is holding up. Although looming fears of an impending earnings crash did not materialise, the corporate world experienced a significant profit slump, which is set to persist in the upcoming quarters. So, which are the most important trends to keep a close eye on and how can they affect firms’ financials moving forward?
Not great, not terrible
The last few weeks were eventful for US stock markets as the world’s largest companies revealed their first quarter financial figures, facing extremely tough year-on-year comparisons amid a slowing global economy. Wall Street posted its second consecutive quarter of negative earnings growth, but analysts fear that the worst could be ahead of us.
More specifically, earnings per share for the S&P 500 index are on track to contract 2.6%, with the number getting a lot worse if we account for the stubbornly high inflation. Furthermore, even though more than 70% of S&P 500 firms topped expectations, this should not be considered a positive sign as analysts had drastically downgraded their forecasts going into the earnings season.
Surprisingly, equity indices have gained ground during that period mainly due to increasing bets of faster rate cuts by the Fed. Besides the purely macroeconomic side, there are also some specific themes and trends that are likely to impact corporate performance in the upcoming months.
Compressed margins and layoffs
During the past couple of quarters, the slowing global economy has been applying downside pressure on profit margins, while companies have been facing increasing labor costs as workers demand wage increases to keep up with inflation. This phenomenon was evident in many leading firms, which saw their sales figures growing faster than their earnings.
Up until now, enterprises were profiteering with the excuse that input costs rose massively from the war-induced energy crisis and the Covid-19 supply bottlenecks. However, as both themes subsided, they are seeing their profit margins getting increasingly squeezed, forcing them to proceed to massive layoffs across all sectors.
Even though this strategy has immediate and certain results, it is clearly not a sustainable solution and the anticipated improvement in profit margins could prove to be short-lived. Apart from that, operating costs could re-accelerate in the next growth phase of the economy as companies that have fired excessively would need to pay a ‘premium’ to attract talent.
Banking turmoil
Earnings of the banking sector had particular interest for a wide range of reasons. On the one hand, investors would assess whether the industry is shielded from another systemic episode, while corporations would gauge whether future credit conditions that were expected to tighten significantly. Overall, results were mixed, with big banks exhibiting solid performance, whereas smaller players in the sector failed to shrug off credibility concerns.
The US regional banks remain under pressure as more and more customers are starting to fall behind on obligations. Meanwhile, high interest rates continue to encourage deposit flight towards money market funds and other low risk investments. As a result, smaller banks will probably keep raising provisions and tightening lending conditions, which apart from deteriorating their financial performance is also likely to suppress growth and hurt consumption. Eventually, these problems could ripple into risk-sensitive sectors such as commercial real estate.
Tech sector reigns supreme
Undoubtedly, tech earnings were the bright spot of this earnings season, with the FAANG clan outperforming analysts’ estimates. These upbeat earnings coupled with the anticipation of faster rate cuts by the Fed have propelled the tech-heavy Nasdaq 100 higher.
Taking a technical look, the US 100 index has been in a steady uptrend since mid-March, generating a profound structure of higher highs. Should the advance resume, the price is on track to challenge the August 2022 peak of $13,720. On the flipside, a trend reversal could encounter support at the April low of $12,725.
As the Q1 earnings season draws to an end, investors are closely scrutinising companies’ financial results to assess the health of the US economy and whether consumer spending is holding up. Although looming fears of an impending earnings crash did not materialise, the corporate world experienced a significant profit slump, which is set to persist in the upcoming quarters. So, which are the most important trends to keep a close eye on and how can they affect firms’ financials moving forward?
Not great, not terrible
The last few weeks were eventful for US stock markets as the world’s largest companies revealed their first quarter financial figures, facing extremely tough year-on-year comparisons amid a slowing global economy. Wall Street posted its second consecutive quarter of negative earnings growth, but analysts fear that the worst could be ahead of us.
More specifically, earnings per share for the S&P 500 index are on track to contract 2.6%, with the number getting a lot worse if we account for the stubbornly high inflation. Furthermore, even though more than 70% of S&P 500 firms topped expectations, this should not be considered a positive sign as analysts had drastically downgraded their forecasts going into the earnings season.
Surprisingly, equity indices have gained ground during that period mainly due to increasing bets of faster rate cuts by the Fed. Besides the purely macroeconomic side, there are also some specific themes and trends that are likely to impact corporate performance in the upcoming months.
Compressed margins and layoffs
During the past couple of quarters, the slowing global economy has been applying downside pressure on profit margins, while companies have been facing increasing labor costs as workers demand wage increases to keep up with inflation. This phenomenon was evident in many leading firms, which saw their sales figures growing faster than their earnings.
Up until now, enterprises were profiteering with the excuse that input costs rose massively from the war-induced energy crisis and the Covid-19 supply bottlenecks. However, as both themes subsided, they are seeing their profit margins getting increasingly squeezed, forcing them to proceed to massive layoffs across all sectors.
Even though this strategy has immediate and certain results, it is clearly not a sustainable solution and the anticipated improvement in profit margins could prove to be short-lived. Apart from that, operating costs could re-accelerate in the next growth phase of the economy as companies that have fired excessively would need to pay a ‘premium’ to attract talent.
Banking turmoil
Earnings of the banking sector had particular interest for a wide range of reasons. On the one hand, investors would assess whether the industry is shielded from another systemic episode, while corporations would gauge whether future credit conditions that were expected to tighten significantly. Overall, results were mixed, with big banks exhibiting solid performance, whereas smaller players in the sector failed to shrug off credibility concerns.
The US regional banks remain under pressure as more and more customers are starting to fall behind on obligations. Meanwhile, high interest rates continue to encourage deposit flight towards money market funds and other low risk investments. As a result, smaller banks will probably keep raising provisions and tightening lending conditions, which apart from deteriorating their financial performance is also likely to suppress growth and hurt consumption. Eventually, these problems could ripple into risk-sensitive sectors such as commercial real estate.
Tech sector reigns supreme
Undoubtedly, tech earnings were the bright spot of this earnings season, with the FAANG clan outperforming analysts’ estimates. These upbeat earnings coupled with the anticipation of faster rate cuts by the Fed have propelled the tech-heavy Nasdaq 100 higher.
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