U.S. companies are in a precarious spot as the most important week of earnings season begins Monday.
Investors will get a better sense of how corporate profits are being impacted by inflation and the Federal Reserve’s hikes to interest rates as 35% of S&P 500 companies are due to report quarterly results this week, according to Savita Subramanian, one of Bank of America’s top U.S. equity strategists.
Subramanian said in a Monday client note that while the fourth quarter earnings season has gotten off to a mediocre start, there’s also room for the outlook for corporate profits to darken further in the coming weeks.
Earlier this month, she said that S&P 500 companies could see earnings contract by as much as 10% in 2023 compared with 2022. While Wall Street generally remains more sanguine than Bank of America, expectations for how corporate profits will hold up this year have fallen sharply since June. Consensus expectations for net income fell by 11% for the S&P 500 since the June peak, according to BofA.
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See: Bank of America’s Subramanian says S&P 500 earnings risk a 10% drop in 2023
Earnings expectations have continued to diminish since the start of the year, with analysts lowering their outlooks by an unusually large margin, Subramanian said in Monday’s client note.
“Earnings season has showed little fundamental support for the bulls – from last July to now, consensus has cut earnings from $250 to $226 (halfway to our $200 forecast), 2023E EPS has been cut by 1.5% YTD, 2.5x the typical cut, and 2023E EPS is now below its historical revision trend,” she said.
How companies performed in the fourth quarter will hold important clues for how they will perform in 2023, she said.
With that in mind, here are a few key charts from BofA’s latest earnings season deep dive that may help investors keep track of where things stand.
This is the busiest week of the quarter for corporate earnings
More than one-third of S&P 500 companies will report earnings this week, including a handful of megacap technology names like Apple Inc.
AAPL,
-2.01%,
Meta Platforms Inc.
META,
-3.08%
and Amazon.com Inc.
AMZN,
-1.65%
All three companies were among the index’s biggest losers in terms of their performance in 2022, although their performance has markedly improved since the start of 2023.
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Here’s a breakdown of how many S&P 500 firms are reporting per day.
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Companies are coming off a historic streak of earnings growth
Outside of the energy sector, U.S. corporate earnings contracted for most of last year as companies juggled aggressive inflation, a strong U.S. dollar and aggressive Federal Reserve interest-rate hikes. Before that, earnings had soared, leading to the best 20-year growth streak since World War II. In 2020 and 2021, earnings had roughly quintupled over the prior year, according to BofA’s figures.
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Companies on track to report first decline in profits since 2020
Unfortunately for investors, this unprecedented growth spurt is coming undone. And as of the end of last week, S&P 500 companies are on track to undershoot Wall Street’s conservative profit expectations.
According to FactSet data, the blended earnings decline for the fourth quarter of 2022 was negative 5%. It factors in both Wall Street’s expectations for companies that have yet to report, along with the actual results shared by the 143 S&P 500 companies that had reported Q4 earnings through Friday.
If this figure holds through a final tally, it would mark the first time the S&P 500 has reported a year-over-year decline in earnings since the third quarter of 2020.
So far, financial services firms have been the largest contributors to this underperformance, according to BofA, with a year-over-year contraction of nearly 8%, driven largely by volatility in capital markets last year, as well as a plunge in deal-making activity as the Fed raised borrowing costs at the most aggressive pace since at least the 1980s. Financial services firms also are some of the earliest companies to report.
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After a strong start to the year, U.S. stocks were kicking off the week in the red as investors braced for the earnings deluge to come.
There’s also more than earnings happening this week. Some of the world’s largest central banks, including the Federal Reserve, European Central Bank and Bank of England, are expected to hike interest rates when they meet this week.
The S&P 500
SPX,
-1.30%
was down 1.1% in recent trade, near 4,026, while the Dow Jones Industrial Average
DJIA,
-0.77%
was off 200 points, or 0.6%. The Nasdaq Composite
COMP,
-5.51%
was off 1.7%.