EARNINGS: Fed interest rate hikes will start catching up with both the economy and company earnings in 2023. This will flip the script on last year’s resilient earnings and plunging valuations. Q4 earnings season, which starts Friday, is a prelude to this and may see the first US fall since Q3 2020. But we are less negative and see another ‘less-bad’ season. With lower but resilient profits and margins giving relief to worried investors. Consensus is for S&P 500 earnings to fall -2% (see chart) whilst Europe’ Stoxx 600 rise 14%. Management 2023 guidance will be a focus.
QUARTER: JP Morgan (JPM) and US banks kick off the Q4 season. Loan loss provisions and weak capital markets are an earnings drag. But mask strong revenues from solid loan demand and higher interest rates. Tech will lead the earnings downdraft, with a double whammy of lower discretionary demand plus write-back from the covid boom. Amazon (AMZN), Intel (INTC), Meta (META) are the biggest drags on Q4 S&P 500 forecasts. Defensives will do as advertised, with both pricing power and resilient demand. Energy will again ride to the rescue, helped by 10% higher oil prices. Exxon (XOM), Chevron (CVX), Boeing (BA) are the biggest EPS contributors.
OUTLOOK: Earnings forecasts near always fall during the year. The only question is how much. Consensus is for 5% S&P 500 growth in 2023 even with recessionary clouds on the horizon. But investors seem braced for much lower. We are more positive. Estimates have already been cut a lot. For example, Q4 EPS growth by 16pp in the past year. The Q4 GDP NOWCast is a strong 4.1%. Falling inflation will support the consumer. A weaker dollar is now less a headwind for the 1/3 of overseas sales. And the Fed supply chain disruption index is down 77% from its peak.
All data, figures & charts are valid as of 11/01/2023