As companies prepare to open their books to investors in the coming weeks, in a quarterly ritual known as earnings season, market watchers are expected to compare past profits with better forecasts for future performance. Balancing the weak estimates.
Stock prices tend to follow expectations of upcoming earnings rather than react to past details, and the market has risen in line with investors’ improved outlook for the economy. The S&P 500 index has gained more than 20 percent since October.
According to FactSet, companies in the index are expected to report a 7 per cent decline in earnings during the three months to June as compared to the same period last year. But much of that decline is concentrated in certain sectors, such as energy, that posted much higher profits last year, making comparisons this year difficult. And corporate executives also have a habit of lowering investors’ expectations before earnings announcements in order to beat estimates.
“The bottom of the earnings cycle may have already arrived,” said Binky Chadha, chief US equity strategist at Deutsche Bank, who correctly predicted that stocks would rally this year, contrary to consensus.
The gloomy predictions at the beginning of the year did not come true. Despite widespread fears of a recession, the economy remains resilient. The latest report on inflation released this week inspired optimism that the Federal Reserve can tame rising prices without pushing the broader economy — and corporate America — into a deeper recession.
With the strength of consumer spending underpinning economic resilience, the focus will be firmly on how households are faring as the pandemic erodes savings. However, here too, many of the big companies have already managed to raise prices significantly, reducing the impact of any consumer weakness that is yet to come.
This year, Pepsi said it has already increased its prices enough to offset rising costs for the remainder of 2023. On Thursday, the company reported that for the three months through June, it raised prices by 15 percent, reflecting the continued affordability of consumers. Absorbing higher prices, and companies’ willingness to take advantage of this.
“It’s encouraging that the consumer still appears to be quite resilient,” said Bonnie Herzog, an analyst at Goldman Sachs.
Pepsi Chief Executive Ramon Laguarta told analysts Thursday morning that a strong job market in the United States and abroad has helped consumers. Data released last week by the Labor Department showed that even though the economy has cooled, unemployment remains low.
Even some of the companies most affected by the pandemic, such as cruise operator Royal Caribbean and Carnival Cruise Line, have begun to stage a comeback.
While analysts predicted that Pepsi would post strong financial results, the company still outperformed expectations, sending its share price up 2.4 percent on Thursday. According to FactSet, over the past 10 years, more than 70 percent of companies have outperformed analyst forecasts on average.
Even though some companies may be sliding, investors have already ruled out a 2.1 percent decline in earnings for the quarter, a decline that proved better than the more than 6 percent decline expected.
That outperformance helped propel the S&P 500 higher. At the beginning of the year, the average analyst forecast that the S&P would gain about 5 percent during 2023, according to Bloomberg’s forecast aggregation. It took less than a month to cross that level.
Forecasters such as Bank of America, Goldman Sachs and BMO have since raised their expectations.
John Flood, head of the US equity sales business at Goldman Sachs, said in a note to clients on Wednesday that for the first time this year he is questioning whether the S&P 500 can hit a record high in 2023, which remains around 5. . percent off. He wrote, “I am going with yes.”
Still, with only a few analysts expecting the index to move higher from here, much of the bullishness on the resumption of earnings growth has already added to the rally.
Some, including analysts at Cantor, Morgan Stanley, BNP Paribas and Barclays, are forecasting a decline of around 10 percent or more before the end of the year.
The sharp rise since the S&P 500 bottomed out in October means the companies are already valued at historically high levels. While unemployment remains low, there are signs of softening in the labor market. Pepsi reported strong earnings and raised prices, but its sales volumes were affected as a result, as some consumers protested the higher price tag.
Some analysts also point to the end of the student loan moratorium, which means loan repayments will resume in the fall, which is another headwind for consumers.
Apart from a slew of technology companies that have driven up the market partly due to enthusiasm over the profit potential of artificial intelligence, companies may face greater resistance to higher prices, while costs – such as higher wages – Will continue, said Venu Krishna, head of US equity strategy at Barclays.
“We are still seeing earnings pressure,” he said.
Even some of the more optimistic strategists acknowledge that although the worst-case scenario for the company’s earnings may soon appear in the rearview mirror, it will be more difficult for stock prices to continue rising as much of the recent optimism has been eroded. The share is already embedded in the market.
Still, the outlook for the latest round of financial results is a far cry from the gloomy predictions made at the start of the year, with Mr Chadha expecting stock prices to still remain “at a higher level”.
“Investors have a long list of concerns and whether or not we will go into recession is an open question,” he added. “But given the long talked about potential recession and it is expected to be mild, we think the market selloff will be minor and short-lived.”
