US investors face grim earnings season
By Sagarika Jaisinghani
Investors are bracing for a miserable stretch of earnings reports that will likely extend the dominance of value shares as corporate America grapples with high inflation and rising borrowing costs.
The latest MLIV Pulse survey shows the broad view on stocks remains deeply pessimistic as earnings heat up this week, with most of the 424 respondents expecting the S&P 500 Index’s slide to deepen. The results signal no relief for equities already reeling from their biggest annual slump since 2008 amid a toxic mix of hawkish central banks, a strong dollar and the spectre of recession.
Over half of survey takers said they’re inclined to invest more in cheaper, so-called value stocks, compared with only 39 per cent three months ago. The sector’s outperformance versus growth last year was the greatest since 2000 as rising rates hurt expensive sectors such as technology by increasing the discount for the present value of future profits.
“We do believe that value names will outperform this season as those companies tend to be much more domestically focused and are benefiting from the pandemic recovery,” said Jay Hatfield, chief executive officer at Infrastructure Capital Advisors in New York.
US companies’ announcements start in earnest on January 13 with results from major banks including JPMorgan Chase and Citigroup.
As ugly as fourth-quarter reporting looks to be, subsequent earnings seasons may be worse. Nearly 50 per cent of survey respondents say releases for the April-June period will reflect the most damage from a potential economic contraction. By then, it may be time to exit value – more vulnerable to the economic cycle – and switch back to growth.
A key question this season is how resilient profit margins will prove to be in the face of surging costs. Underwhelming early reports – including from Exxon Mobil, Tesla and Micron Technology – show there are reasons to worry, while job cuts portend growing struggles in the technology sector.
Bloomberg Intelligence analysts expect S&P 500 earnings to have fallen 3.1 per cent in the fourth quarter, compared with a year earlier. The S&P 500 Pure Growth Index, which tracks firms in that sector, is projected to post an earnings drop of about 16 per cent, while profits at its value counterpart likely rose 1.4 per cent.
“We’re coming off all-time-high corporate margins and with the inflationary and recessionary pressures in place, we’re likely to see earnings roll over,” said Anneka Treon, a managing director at Van Lanschot Kempen in Amsterdam.
Some 31 per cent of survey participants expect cooling inflation to be the biggest positive driver for earnings this period, with slightly lower tallies for cost-cutting and supply-chain improvements. Consumer-price pressures have ebbed from a four-decade high, and fresh data due January 12 are expected to show further easing.
Yet investors are reluctant to buy in without a clearer read on the Fed. The market trimmed expectations for how high the central bank will push its overnight benchmark this year after data on Friday showed slower-than-projected wage growth and weakness in services.
Esty Dwek, chief investment officer at Flowbank SA in Geneva, said she’s more optimistic about equities as “we’re close to the end of the tightening cycle and data continues to point to disinflation.” Yet, she expects volatility to persist before returns recover in the second half.
That echoes the view of fund managers surveyed last month, as well as calls by Wall Street strategists for further declines in the S&P 500 before a rebound fuelled by a pause in Fed hikes.
Tech firms – investor favourites for much of the last decade – have suffered steep losses. The tech-heavy Nasdaq 100 slumped 33 per cent in 2022, compared with a 9 per cent decline in the Dow Jones Industrial Average, which comprises more value stocks.
Big-tech job cuts grabbed headlines last season and no letup is apparent with Amazon.com unveiling the biggest reduction in its history and Salesforce saying it would cut about 10 per cent of its workforce. Morgan Stanley strategist Michael Wilson warned such measures may not be enough to bolster profit margins.
With almost 60 per cent of survey participants projecting higher 10-year Treasury yields over the next month, the outlook for growth stocks remains grim.
Goldman Sachs market strategists said last week that although stock valuations fell sharply last year, growth shares are still expensive, while financials and energy are relatively cheaper.
The path of the economy may alter that dynamic, with most analysts seeing a recession this year. BI analysts expect S&P 500 Pure Growth Index earnings to rise 4.1 per cent for 2023, compared with a 2.3 per cent drop in the value gauge. For now, though, a defensive posture is preferable to many money managers.
“There are so many variables at play and the earnings potential of value versus growth will be dependent on how quickly rate rises turn to rate cuts and how deep recession takes the global economy underwater,” said Danni Hewson, a financial analyst at AJ Bell. “For many, this set of results will be the moment when the chickens really come home to roost.”
Washington Post
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