This is the quarter that investors have been waiting for.
A perfect storm of rising interest rates, inflation, and slowing growth has weighed on corporate America and will soon be revealed in upcoming fourth-quarter earnings reports. Known as a 10Q, the quarterly financial filing required of public companies is due to the SEC 45 days after the end of each fiscal quarter.
Since most corporations use a calendar quarter, the window from now until February 15 will be when this data is filed and made available to the public. After a disappointing third-quarter reporting period, analysts are projecting that fourth-quarter U.S. earnings will decline for the first time in two years as the aforementioned reasons dampen the outlook.
The remainder of the year does not bode well, either. Estimates have been falling for 2023 quarters, and Goldman Sachs recently cut its 2023 S&P 500 earnings per share growth forecast to zero, citing weakening profit margins. The last time there was a quarterly decline in S&P 500 earnings was in the third quarter of 2020, when companies were still reeling from the initial shock of and disruptions caused by the coronavirus pandemic.
The continued macroeconomic decline has painted a much different picture of Q4 earnings from as recently as September. Analysts are forecasting an earnings contraction of about 3.5% for the fourth quarter, according to FactSet.
That estimate, as of the end of last year, is an about-face from forecasts back in September of 3.5% growth and a sharp reversal from 8.5% growth forecasts in June. As long as the Federal Reserve continues to raise rates literally and rhetorically to fight inflation, there will be the risk of slowing the economy too much, which will ultimately get reflected in earnings, or the lack thereof.
According to a Morgan Stanley report to investors in December, “Rates and inflation may have peaked, but we see that as a warning sign for profitability, a reality we believe is still underappreciated but can no longer be ignored.” So how do companies try to prop up earnings in these difficult times? To combat inflation they raise prices.
However, prices are only so elastic, and corporate profits will ultimately not be able to compensate in this manner as consumers increasingly cut back on spending. Another inherent method of tightening the bottom line is by reducing staff and laying off workers. It doesn’t seem like a day goes by when you don’t see top companies laying off a significant portion of their workforce.
Computer maker HP and chipmaker Micron have both announced job cuts as a part of their plans to deal with weaker demand. Analysts are forecasting a slight earnings contraction for both companies. And just yesterday, Salesforce Inc. said that it is laying off 10% of its workforce and reducing its office space in certain markets, extending a brutal period for tech job cuts into the new year.
As we’ve mentioned before, technology led the market up, and it looks to be leading it back down.
According to Jonathan Golub, head of U.S. equity strategy and quantitative research at Credit Suisse, “Technology and tech-related companies have accounted for more than half of the negative S&P 500 profit revisions for the fourth quarter.” Big tech names like Amazon and Meta Platforms disappointed investors in the third quarter and gave unwelcome forecasts for the upcoming fourth quarter as well.
It’s not solely tech though, so be careful where you are positioned going into 2023.
In addition to the S&P 500 technology sector expecting a decline of some 7.8% by analysts, earnings are also predicted to fall for the communications sector by 20.9%. Overall, seven of the eleven major S&P 500 sectors are expected to show a decline in fourth-quarter earnings from the year ago period, based on data from Refinitiv.
Fundamentally earnings are the engine that drives companies and their stock prices higher. On almost all fronts, albeit economic or financial, there is a severe headwind currently that keeps dwindling down expected earnings for the fourth quarter. This will play out over the next month via 10Q filings with the SEC and press releases from the companies themselves.
Hold onto your hats because it’s like to be a bumpy ride.
