Earnings season is once again upon us and it's forecast to be brutal.
Increased labor costs, rising input prices, supply-chain disruptions, higher interest rates and a strong dollar are just some of the factors expected to weigh on corporate profit margins and, by extension, earnings per share.
With those challenges and more, it's easy to understand why industry analysts expect third-quarter earnings growth to be the weakest we've seen in years.
The S&P 500 is forecast to post third-quarter earnings growth of just 2.4%, according to data from FactSet. Should that prediction come to pass, it would mark the lowest earnings growth rate reported by companies in the benchmark index since the COVID-19-marred third quarter of 2020.
To get a sense of what the experts are saying as we head into earnings season, below please find a selection of commentary (sometimes edited for brevity) from market strategists, investment officers and the like. Although their outlook is collectively bearish, there is at least one silver lining to be found: Expectations are so low heading into earnings season that companies might just be able to trip over them.
- "The last earnings season of the year is kicking off following a week where – in typical 2022 trading fashion – there was no shortage of eyebrow-raising price moves. Despite pulling back to a two-week low last Tuesday, the U.S. dollar index bounced to end last week up more than 17% for the year, and not too far below its 20-year high. We may hear more in the coming weeks on the pressures an exceptionally strong dollar can have on U.S. exports and thus, earnings of U.S. companies, but dollar strength could also play a role in getting the Fed to 'back off' from its tightening policy. Though even if continued dollar strength eventually contributes to the Fed switching from raising rates to cutting them, the timing of such a pivot remains uncertain, and might not change the downward trajectory of corporate earnings." – Chris Larkin, managing director, trading, at E*Trade from Morgan Stanley
- "At long last, the Q3 earnings season will officially begin this week, and investors and traders alike can assess whether the fear enveloping markets is warranted. With recession concerns intensifying as the Fed appears unwavering in its aggressive campaign to curtail inflation, corporate guidance becomes increasingly important. To be sure, headwinds are strengthening as multinationals contend with a strong dollar amid softening global demand, the housing market continues to weaken, and the energy sector appears, yet again, to be the primary winner in the quarter's initial earnings projections. With so much negativity hovering over earnings, the question remains how much has already been discounted, and with the bar set ever lower, could a spate of positive surprises restore a modicum of enthusiasm?" – Quincy Krosby, chief global strategist at LPL Financial
- "Q3 reporting season starts this week and consensus expects 3% year-over-year EPS growth, 13% sales growth and 75 basis point [bp] margin contraction to 11.8%. [1 basis point = 0.01%] Excluding Energy, EPS is expected to fall by 3% and margins to contract by 132 bp. We expect smaller positive surprises in Q3 compared with the first half of 2022 and negative revisions to Q4 and 2023 consensus estimates. Topics for managements to discuss: (1) headwind to sales due to a stronger U.S. dollar, (2) headwind to margins due to elevated inflation and high inventories, (3) tax changes effective in 2023. We recommend stocks with high U.S. sales vs. firms with high foreign sales." – David Kostin, chief U.S. equity strategist at Goldman Sachs
- "We are overweight equities in our strategic views. A higher risk premium and worsening macro backdrop lowers our expected equity returns. But we expect central banks to ultimately live with some inflation and look through the near-term risks. Tactically, we're underweight developed market stocks as central banks look set to overtighten policy – we see activity stalling. Rising input costs also pose a risk to elevated corporate profit margins." – Wei Li, global chief investment strategist at BlackRock Investment Institute
- "The Q3 earnings season begins in earnest, with JPMorgan, Morgan Stanley, Citi and Wells Fargo all reporting on Friday. While analysts have recently been revising their estimates downward, our leading earnings models suggest they haven't gone far enough. In fact, we see considerable downside to embedded EPS estimates, a big reason why we believe the stock market has further to fall." – David Rosenberg, founder and president of Rosenberg Research
- "We see S&P 500 EPS coming in slightly above current consensus estimates, implying well-below average beats. More likely in our view is a continued slide in estimates heading into earnings releases and a near average beat eventually. Our forecast for Q3 S&P 500 EPS is at $56.20, only slightly above the consensus at $55.20, implying a 1.7% beat. However, we note that beats this low are rare and occur only during recessions. It is more likely in our view that estimates continue to slide, and the eventual beat comes in closer to the historical average of 5%. Across sector groups, mega-cap growth (MCG) & Tech and other cyclicals are likely to disappoint with estimates not fully reflecting the macro slowdown, while the defensives and financials are likely to post beats as estimates look too low. This would be a repeat of the pattern last quarter." – Binky Chadha, chief strategist at Deutsche Bank Global Research
- "With consensus estimates expecting a greater than 2% quarter-over-quarter decline in S&P 500 EPS in Q3, the bar is low but not nearly as low as recent quarters. Earnings should beat by 2% to 3%, but downgrades to future quarters are likely to be even more than during Q2, given the slowing economic activity and tighter financial conditions (U.S. dollar, interest rates, etc). Company margins are the biggest investor concern with expectations for margin gains in 2023 at odds with fading sales growth. Consensus expected operating margin increases for REITs, and the Materials, Consumer Staples and Semiconductor sectors, are at odds with slowing sales growth next year. On the other hand, margin expectations for Technology Hardware, Communications Services, Insurance, and Food, Beverage & Tobacco are on the lower side, even with relatively better sales growth expected in 2023." – Keith Parker, strategist at the UBS Global Research and Evidence Lab
Dan Burrows is a financial writer at Kiplinger, having joined the august publication full time in 2016.
A long-time financial journalist, Dan is a veteran of SmartMoney, MarketWatch, CBS MoneyWatch, InvestorPlace and DailyFinance. He has written for The Wall Street Journal, Bloomberg, Consumer Reports, Senior Executive and Boston magazine, and his stories have appeared in the New York Daily News, the San Jose Mercury News and Investor's Business Daily, among other publications. As a senior writer at AOL's DailyFinance, Dan reported market news from the floor of the New York Stock Exchange and hosted a weekly video segment on equities.
Once upon a time – before his days as a financial reporter and assistant financial editor at legendary fashion trade paper Women's Wear Daily – Dan worked for Spy magazine, scribbled away at Time Inc. and contributed to Maxim magazine back when lad mags were a thing. He's also written for Esquire magazine's Dubious Achievements Awards.
In his current role at Kiplinger, Dan writes about equities, fixed income, currencies, commodities, funds, macroeconomics and more.
Dan holds a bachelor's degree from Oberlin College and a master's degree from Columbia University.
Disclosure: Dan does not trade stocks or other securities. Rather, he dollar-cost averages into cheap funds and index funds and holds them forever in tax-advantaged accounts.
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