U.S. equities finished higher last week (S&P 500 +2.5%), closing above the 4000 level for the first time since early December. The path of least resistance remains higher even though earnings season continued to undershoot expectations. Best sectors were consumer discretionary (+6.4%) and technology (+4.1%); worst sectors were healthcare (-0.9%) and utilities (-0.5%).
4Q Reporting Season Continues To Underwhelm
The 4Q reporting season continues to underwhelm with earnings growth expected to decline more than what was anticipated at the beginning of the year. Revenue growth is meeting analyst expectations but is considerably slower than in past quarters and will likely continue to slow further in the future. The dynamic of +4% sales growth and -3% earnings growth gives one an idea of how much pressure margins are really facing now.
2023 Estimates Down More Than Five Dollars Since January 1st
Since the beginning of the year, earnings estimates for the year have been lowered by more than five dollars for the S&P 500 and now sit at $225. The growth rate is now expected to be just 2.6%. Our view remains that earnings are still too high for this year. Margins will continue to face pressure and energy’s outsized contribution is likely going to shrink.
Just 68% Of Companies Beating Analyst Estimates
Although there are still 75% of companies left to report earnings, thus far, just 68% of companies are beating analyst estimates. This is the lowest figure since the 1st quarter of 2020 when the world shut down. Prior to that, one has to go back to the 4Q of 2013 to find a quarter where a lower percentage of companies beat. The lower percentage of beats confirms that analyst estimates remain too high and will likely be lowered over the coming weeks.
Consensus Beginning to Rein In Its Margin Outlook
We had noted previously that the consensus was too optimistic on its outlook for margins as it had begun to expect margin expansion in 2Q’23. As of last Friday’s close, the outlook has begun to deteriorate and margin contraction is expected to continue through the 2nd quarter, with the 3rd quarter now only pricing earnings growth due to margin expansion. Our best guess is that this will be moved lower as well perhaps in the not-too-distant future.
Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance or specific investments. Data provided by Refinitiv.
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