First signs of recession Pain seems to be coming from revenues

(Bloomberg) — Just as investors celebrate the prospect of peak inflation and potential for a soft landing, this earnings season will likely show that there is still plenty left to keep them up at night.

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With costs still rising, interest rates starting to bite and consumer spending falling, the results are expected to reveal the beginning of a US earnings recession, which will last until the second half of 2023, according to Bloomberg Intelligence strategists.

While analysts have been cutting their forecasts in recent weeks, the consensus for corporate earnings in 2023 remains “materially too high” with or without an economic recession, according to Morgan Stanley’s Michael Wilson, who warns that stocks could fall by about 25%. valleys. in the first quarter under pressure from poor earnings and forecasts.

Madison Faller, global strategist at JPMorgan Private Bank, expects management to comment cautiously given mounting recession risks, higher-than-normal inventories and wage pressures.

“As developed economies slow, we think Street’s estimates are likely to remain lower, but not collapse immediately,” Faller said. “The margin deterioration is likely to continue into 2023 and will be central to management discussions with investors.”

Now Wall Street banks including JPMorgan Chase & Co., Citigroup Inc. and Bank of America Corp., have just launched, here are five key areas market participants will be looking at this earnings season:

Powered Pivot

While signs of earnings are important, investors’ attention is focused on the Federal Reserve’s next moves. And as US and European interest rates are expected to peak by the summer, any commentary on the impact of monetary policy will likely be closely watched. Investors will also be interested to know whether companies have been able to secure low borrowing costs for years to come and avoid being hit by rising interest rates.

Against that backdrop, earnings expectations fell for most of last year. Yet they are still too high, according to strategists such as David Kostin of Goldman Sachs Group Inc., who expects further cuts as recession risk, margin pressure and new corporate taxes outweigh upside risks such as China’s reopening.

“The data increasingly points to a slowdown in activity across the board,” said James Athey, investment director at Abrdn. “Very few sectors now seem immune to the slowdown. Realistically, I think we’re still in the early stages of the impact of the Fed’s tightening.”

Consumer spending

Declining demand will take center stage this reporting season as a harbinger of a recession. US economic data showed that consumers lost momentum in November due to higher interest rates and high inflation. Americans are tapping into savings and relying more on credit cards, which raises the question of whether they can continue to drive economic growth through 2023.

Some companies have managed to navigate these headwinds, at least for now. Nike Inc.’s quarterly sales beat Wall Street estimates on higher holiday demand and FedEx Corp. earnings. exceeded analysts’ estimates due to price increases and cost savings. In Europe, Ryanair Holdings Plc, the largest discount airline in the region, raised its full-year profit target following a stronger-than-expected Christmas travel period, while holiday sales increased at Tesco Plc and many other UK retailers.

The attempts have not been successful everywhere. Tesla Inc. delivered fewer vehicles than expected last quarter despite offering hefty stimulus in its largest markets, sending its shares plummeting. Macy’s Inc. also expects to report fourth-quarter sales that were weaker than previously forecast, and sees continued consumer pressure into 2023.

Job losses

Earnings reports will also be watched for further evidence of layoffs as companies react to the deteriorating backdrop. The phenomenon is most pronounced in technology, where companies are cutting jobs at a pace approaching the early days of the pandemic, as evidenced by recent announcements from Inc. and Salesforce Inc. Meanwhile, Facebook owner Meta Platforms Inc., Apple Inc. ., and Alphabet Inc. all delay or pause hiring, while Taiwan Semiconductor Manufacturing Co. braces for disappointing sales by cutting spending.

Within the banking industry, Goldman Sachs, Morgan Stanley, Credit Suisse Group AG and Barclays Plc have all already laid off staff or announced they intend to do so in the coming months. McDonald’s Corp. cuts corporate jobs, the first restaurant chain in the US to do so despite relatively strong sales performance in recent years.

“Many companies have grown too big for the shrinking economy and tougher regulations, and indeed they need more sizing,” said Marija Veitmane, a senior strategist at State Street Global Markets, who explains the “It’s important to look at earnings expectations. which are likely to be much more negative than currently reflected in consensus estimates.”

Energy prices

The impact of falling energy prices will be closely watched after WTI oil plunged more than 35% from its March highs and gas slipped in Europe amid milder weather – a huge turnaround for commodities since just six months ago . Exxon Mobil Corp., the largest U.S. oil company, said lower crude oil and natural gas prices negatively impacted fourth-quarter earnings.

According to Bloomberg Intelligence, U.S. energy company earnings will deliver at least double-digit growth for the fourth consecutive quarter, but earnings could decline year-on-year from Q2 2023 through at least Q1 2025.

“Declining global demand for energy commodities will weigh on the energy sector,” said Joachim Klement, head of strategy, accounting and sustainability at Liberum Capital.

On the other hand, Klement noted that lower energy prices are “good news for industries that have experienced margin pressure in 2021 and 2022. This has been particularly pronounced in the consumer discretionary world.”

China reopens

Commentary from companies with revenue and cost exposure to China will be closely watched after the world’s second-largest economy fully reopens on January 8. Mining, technology and luxury companies in the US and Europe are drawing significant revenue from China, while cosmetics makers in Japan and tourism across Southeast Asia should also see a boost.

With the number of Chinese Covid cases soaring and many countries imposing border restrictions on travelers from the country, the impact of the reopening on global revenues in the current quarter may be limited.

Elsewhere in corporate earnings:

–With help from Ishika Mookerjee.

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