Signs of recession pain expected in earnings reports

Just as investors are celebrating the prospect of peak inflation and the potential for a soft landing, this earnings season will likely show that there is more to keep them up at night.

As costs rise, interest rates begin to bite and consumer spending declines, the results are expected to reveal the beginning of a recession in US income, which will last until the second half of 2023. , according to Bloomberg Intelligence strategists.

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

Madison Faller, global strategist at JPMorgan Private Bank, expects management to provide cautious comments due to rising recession risks, higher-than-normal inventories and wage pressures.

“With the slowdown in developed economies, we think Street estimates will likely continue to decline, but not collapse immediately,” Faller said. “Margin deterioration is likely to continue through 2023 and will be the focus of investor management discussions.”

With Wall Street banks including JPMorgan Chase & What., Citigroup Inc. and Bank of America corp. just getting things started, here are five key areas for market participants to watch this earnings season:

Feed pivot

While signals from earnings are important, investors’ attention is laser-focused on the Federal Reserve’s next move. And with US and European interest rates expected to rise in the summer, any comments on the impact of monetary policy are likely to be closely scrutinized. Investors are also keen to know if companies have been able to secure low borrowing costs for the coming years and avoid feeling the pinch from rising interest rates.

Against that backdrop, revenue estimates fell for much of last year. Although they are still very high, according to strategists like Goldman Sachs Group Inc.’s David Kostin, who expects more cuts because the risk of a recession, margin pressure and new corporate taxes outweigh risks like reopening in China.

“The data is increasingly pointing to a slowdown in activity across the board,” said James Athey, investment director at Abrdn. “Few sectors right now seem immune to the slowdown. In fact, I think we’re still in the early stages of the impact of the Fed’s tightening.

Consumer spending

A slowdown in demand can be pointed to during the reporting period as a sign of recession. US economic data show consumers lost momentum in November amid higher interest rates and high inflation. Americans are tapping into savings and relying more on credit cards, raising questions about whether they can sustain economic growth through 2023.

Some companies have managed to navigate these headwinds, at least for now. Nike The quarterly sales of Inc transgressed Wall Street estimates amid higher demand during the holidays and FedEx Corp. Income beat analysts estimate due to price increases and cost reductions. In Europe, Ryanair Holdings Plc, the region’s largest airline, raised full-year profit target after a stronger-than-expected Christmas travel season, while holiday sales rose to Tesco Plc and many other UK retailers.

The attempts were unsuccessful everywhere. Tesla Inc. brought fewer vehicles than expected last quarter despite offering big incentives in its biggest markets, sending its shares tumbling. Macy’s Inc expecting to report fourth-quarter sales weaker than previously forecast, and sees continued consumer pressure in 2023.

Work cut

Earnings reports will also be watched for further evidence of layoffs as companies react to the worsening backdrop. The event is the most pronounced in tech, where companies cutting jobs at a pace approaching the first days of the pandemic, as evidenced by recent announcements from Inc. and Salesforce Inc. Meanwhile, Facebook owner of Meta Platforms Inc., Apple Inc., and Alphabet Inc. everyone is slowing down or stopping hiring, meanwhile Semiconductor Manufacturing in Taiwan The Co. braced for weaker-than-expected sales by reduced spending.

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

“Many companies have become too large for the economic downturn and the more difficult regulatory environment, and they are in fact in a greater need for the right size,” said Marija Veitmane, a senior strategist of State Street Global Markets, who emphasized the “importance of looking at the guidance of the income, which is probably more negative than currently shown in the consensus estimates.”

Energy prices

The impact of falling power prices will be closely watched after WTI oil fell 35% from its March peaks and gas slid in Europe amid milder weather – a major turnaround. for commodities from just six months ago. Exxon Mobil Corp., the largest U.S. oil company, said low crude and natural gas prices have a negative effect in fourth quarter earnings.

U.S. energy companies’ earnings are set for a fourth straight quarter of at least double-digit growth, but could post a year-over-year decline in earnings from the second quarter of 2023 through the first quarter of 2025, according to Bloomberg Intelligence.

“The slowdown in 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 the low price of electricity is “good news for sectors that suffer a margin squeeze in 2021 and 2022. This is especially pronounced in the consumer discretionary world.”

China’s reopening

Comments from companies with China’s revenue and cost exposure will be closely watched, after the world’s second-largest economy fully reopened on January 8. Mining, technology and luxury companies in US and Europe get a lot of sales from China, while cosmetics manufacturers in Japan and tourism stocks across Southeast Asia should also get a boost.

However, with the increase in Chinese Covid cases and many countries imposing border restrictions for travelers from the country, the impact of the reopening on global income may be limited in the current quarter.

Elsewhere in corporate income:


  • Taiwan Semiconductor Manufacturing rose in Taipei, tracking its ADRs higher, after the chipmaker said it was cutting spending as it expected weaker sales ahead. While analysts noted that the company’s outlook could weigh on the sector, they also saw signs of a potential near-term downside.
  • Fast Retailing shares fell after Uniqlo owner’s operating profit missed analyst estimates on the impact of the pandemic in China


  • Kindred fell after preliminary 4Q results missed expectations. The online gambling company said betting activity during the World Cup football season was not enough to make up for lost revenue from fewer football league games.
  • Partners Group shares fell after the Swiss firm reported assets under management that were not expected. The “significant slowdown” was a “clearly negative surprise,” Vontobel analysts said. Separately, General Society and Citigroup downgraded the stock


  • Bank stocks reversed earlier losses to trade higher on Friday, even as executives including Jamie Dimon of JPMorgan and Brian Moynihan of Bank of America warned of an uncertain economic environment as four of the six largest US lenders reported their results for the fourth quarter.
  • Wendy’s shares edged higher as investors focused on better-than-expected preliminary fourth-quarter results, increased capital allocation, and the removal of Trian’s disruptive strategic review.

—With assistance from Ishika Mookerjee

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