Earnings Outlook: Are Recession Concerns Alive or Abating?
- By John Tierney
- 2 min read
Summary
- The CPI data and first batch of earnings came in as expected, and the market rallied modestly – but it was not a game-changing week.
- Analysts are pencilling in 2023 earnings growth of 9% for the S&P 500 and 15% for the NASDAQ 100. We are sceptical – that will require a robust economy and inflation in the face of higher rates to come.
This article is only available to Macro Hive subscribers. Sign-up to receive world-class macro analysis with a daily curated newsletter, podcast, original content from award-winning researchers, cross market strategy, equity insights, trade ideas, crypto flow frameworks, academic paper summaries, explanation and analysis of market-moving events, community investor chat room, and more.
Summary
- The CPI data and first batch of earnings came in as expected, and the market rallied modestly – but it was not a game-changing week.
- Analysts are pencilling in 2023 earnings growth of 9% for the S&P 500 and 15% for the NASDAQ 100. We are sceptical – that will require a robust economy and inflation in the face of higher rates to come.
- Some 42 companies report this week, including a bevy of regional banks and bellwethers such as Procter and Gamble (PG), United Airlines (UAL), Alcoa (AA), JB Hunt Transportation (JBHT), and Netflix (NFLX).
- Their outlooks will say much about whether recession concerns expressed in Q3 earnings reports are alive or receding.
What We Learned Last Week
It was something of a Goldilocks week. The December employment report showed ongoing vigour but manageable wage gains; the Consumer Prices Index (CPI) came in as expected at 6% YoY; and the initial burst of earnings was constructive with some cautionary notes. This was enough for the S&P 500 (SPX) and NASDAQ 100 (NDX) to rally 2.6% and 4.5%, respectively, but remain well within the trading range of H2 2022.
We expect equities will teeter between a constructive tone and modest pullbacks as earnings season gets going. Q4 and full-year earnings should be generally good, but we would not be surprised if many companies offer cautious full-year outlooks.
The big earnings story last week was the money centre banks. JP Morgan Chase (JPM), CitiGroup (C), and Wells Fargo (WFC) reported earnings in line with or better than expectations. The general picture is a still healthy (albeit more cautious) consumer, with the risk of a mild recession. Banks increased loan loss reserves modestly, which is nothing to get giddy about.
Delta Airlines (DAL) gave a positive outlook on consumer travel plans. Whatever spending they cut in 2023, it is unlikely to involve flying vacations. But DAL also pointed to rising cost pressures that will keep earnings in check.
Earnings Outlooks Looking Up – It is early in the year, but analysts have a robust outlook for earnings, with SPX rising 9% and NDX rising 15%! Granted, earnings growth was anaemic in H2 2022, about flat for SPX, and -155% for NDX, so a rebound stands to reason. Still, 2023 projections point towards a robust economy and ongoing inflation in the face of higher impending rates. We will reassess that view as Q4 earnings reports accumulate.
SPX is about fair value, and NDX is overvalued by 15% by our metrics, even with the robust earnings outlook.
We expect SPX to trade sideways to modestly higher for now. NDX will be vulnerable if large tech companies continue to report weak advertising growth or other headwinds. The widely reported tech layoffs may support earnings, but there is also the risk that they make the same mistake that big banks have so often made in the past: firing by the thousand when tougher times arrive (incurring high severance charges), then hiring by the thousand when markets improve (incurring high recruiting expenses).
The Week Ahead
Q4 earnings season warms up, with some 42 companies reporting. We will hear from a bevy of regional banks and some notable bellwethers like United Airlines (UAL), JH Hunt Transportation (JBHT), Goldman Sachs, Procter and Gamble (PG), and Netflix (NFLX).
Their outlooks will say much about whether recession concerns expressed in Q3 earnings reports are still alive or receding.
Monday
US markets closed – enjoy Martin Luther King Day!
Tuesday
- Goldman Sachs (GS) already indicated that its consumer banking division will post a loss and be restructured. We should get more details about layoffs and affected divisions and how capital markets fared.
- We also get an update on how Morgan Stanley’s (MS) wealth management strategy is doing amidst inflation.
- United Airlines (UAL) will likely report a good outlook for travel demand; is it facing the same cost pressures as DAL?
Wednesday
- Aluminium producer and manufacturer Alcoa (AA) may have interesting comments about China’s reopening and how it may impact aluminium pricing and demand.
- JBHT Hunt Transportation (JBHT) is at the nexus of trucking and rail transportation. Last quarter, shipping volumes were weakening; is that still the case for H1 2023?
Thursday
- This is the big day for regional banks, with 10 slated to report, including heavyweights KeyCorp (KEY), Comerica (CMA), Fifth Third (FITB), and M&T Bank (MTB). Loan demand is a barometer of underlying economic activity for all the regionals.
- Procter and Gamble (PG) will likely report that its profits are outrunning inflation, but volumes are a bit soft. The big question is whether it boosts its revenue and earnings per share (EPS) outlook meaningfully.
- Fastenal (FAST), a maker of fasteners for industry and consumers, was one of the early companies to flag a softening (albeit still healthy) new order pipeline. For a low-visibility company, its outlook could weigh on market sentiment more than supposed.
- Everyone will be watching to see if Netflix (NFLX) says more about its planned advertising tier and how it might affect future profitability and growth.
Friday
- Oilfield services giant Schlumberger Ltd. (SLB) should indicate how lower energy prices are affecting oil exploration activity globally and offer an outlook on oil prices.
- More regional banks report, including Regions Financial (RF) and Huntington Bancshares (HBAN).
- Ally Financial (ALLY) should report on demand for auto loans and, more critically, whether delinquencies and repossessions are on the rise.