The Week in Review: May 22, 2023
About That Earnings Apocalypse
Some investors were bracing for an earnings apocalypse. Once again, fears were exaggerated.
It’s not the first time some have been expecting dire results. A CNBC story six months ago previewing Q1 profits suggested earnings could disappoint in a big way. They didn’t.
Why wasn’t there a letdown in Q1? Let’s look at a couple of possibilities.
First, analysts have traditionally been too cautious with their corporate earnings forecasts. Q1 was no exception. Usually, analysts lower their numbers too much as firms gear up to report and firms step over a low hurdle.
Second, we’re not in a recession. Fortune 500 companies are huge. They may execute well and expand their reach. Or conditions in their industry may be more robust than the overall economy, and they benefit.
But they aren’t immune to missteps. If they fail to execute, it can be reflected in disappointing sales and profits.
But because these firms are so big, most aren’t immune to the tailwinds and headwinds that an economic expansion or recession will bring. If folks are spending, they are typically the recipients. If folks are stingy, they feel the pain.
With 94% of S&P 500 firms having reported in Q1, earnings are projected to fall by just 0.2% versus one year ago per Refintiv. On an absolute basis, it’s not impressive.
But analysts had been expecting profits to decline by over 5% back on April 1. In other words, it’s a sizable beat.
Why do we care? Over a longer period, profits play a big role in the direction of stock prices.
Looking at Q1, it boils down to modest overall economic growth and expectations that were too gloomy.
If we slip into a recession, we’d probably expect profits to decline by roughly 10 – 20%, though it would depend on how shallow or deep any recession might be.
Currently, analysts aren’t pricing a recession into their forecasts. Why? The outlook is murky, but there aren’t any concrete signs that the economy is about to contract.
Notably, analysts are expecting record earnings in Q3 and Q4. That’s far from recessionary. But six to nine months out in earnings land is almost an eternity.
Let’s take those estimates with a couple of grains of salt. It wouldn’t be a surprise if the projections were tweaked in response to company-issued forecasts and changes in the economy.
Two for the Road
New York City has 26 Empire State Buildings’ worth of empty office space. - The Independent, May 10, 2023
In the most recent quarter, Harley-Davidson reported credit losses of $52.6 million. There are literally not enough repossession companies to handle the volume of delinquencies that motorcycle owners are driving. - The Wall Street Journal, May 3, 2023
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