From January 9, with the bank stocks starting the Q4 2022 earnings season, the market begins to question that whether the wave of “earnings plunge” will beign or not. So, how do the institutions view this issue?
Source: Credit Suisse
I. Overview of Earnings Expectations
Generally speaking, Wall Street analysts tend to revise earnings estimates before the earnings season, so as to make the companies' earnings beat the expectation.
According to Credit Suisse,
the consensus estimate for 2022 Q4 $S&P 500(.SPX)$ EPS has been revised down by 7.8% since the end of September last year, which is lower than the averege downward revision of 4.6% for the same period of 2011-2019.
It would make the year-over-year EPS growth estimate for 2022 Q4 S&P 500 slip to -2.0%.
Source: Credit Suisse
Credit Suisse's report also splits the source of EPS for Q4 2022.
It derives that EPS YoY growth (-2%) = Revenue YoY growth (4.1%) + Margin YoY growth (-8.3%) + Company buybacks YoY growth (2%). Under a high interest rate and inflation backdrop,the decline in profit margins clearly becomes the main driver of the earnings decline.
On the other hand, positive earnings estimates for $Exxon Mobil(XOM)$ and $Boeing(BA)$ contribute most to the S&P 500, while $Amazon.com(AMZN)$ is expected to be a -2.3% drag on the S&P 500's overall consensus earnings estimates.
Source: Credit Suisse
Looking ahead to full-year 2023, the consensus estimate among Wall Street analysts is for EPS to decline modestly in Q1 and Q2, and rise sharply in Q3 and Q4.
Source: Credit Suisse
II. Operational efficiency will be the focus of the earnings season.
Mike Wilson, chief equity strategy analyst at Morgan Stanley, believes that
in the current challenging macro environment, operational efficiency will significantly widen the gap between good companies and average companies.
According to Morgan Stanley,
the frequency of mentions of "Efficiency" on corporate transcripts has increased significantly since last year and is now the highest in nearly 20 years.
Source: Morgan Stanley
Since the post-pandemicera, labor and supply shortages have led many companies to significantly increase spending to meet consumer demand above the trend line.
However, in a high interest rate and inflation environment,thedemand reverses. Even many asset-light tech companies are not reducing spending fast enough, and for consumer goods and services companies, labor shortages and frequent employee job-hopping are causing them to also hire very aggressively.
All of these additional operating costs will seriously erode the company's profits.TheMorgan Stanleyteam believes that minimizing capital expenditures and inventory, optimizing labor expenses and financing costs, and maximizing cash flow are the keys to improving operational efficiency.
In the chart below, the factors related to operational efficiency have outperformed significantly since last year.
Source: Morgan Stanley
III. China's reopening benefits companies with a larger share of overseas revenue
China's reopening was undoubtedly the biggest shotfor the global economy in the first half of the year.
According to Goldman Sachs research, since Q4 2022, companies with a higher share of China revenues have significantly outperformed companies with a higher share of US domestic revenues by 8%. As the shock of the pandemic fades, the new demand from China's recovery is expected to continue this trend.
Source: Goldman Sachs
Summary
Overall, we can broadly conclude from the data and analysis of the institutions that they already have lowered earnings expectations for this earnings season and the first half of this year.
In the context of a certain slowdown in Fed's rate hike path, if there is no new black swan event that triggers a sharp decline in earnings expectations, we should not be overly pessimistic about US stocks.
By paying attention to the management's expression of operational efficiency-related factors in this earnings season, it is more likely to find the company that can bringhigh returns.
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