Wall Street is bracing for a tough earnings season as macroeconomic points weigh on revenue margins. But even when third-quarter outcomes aren’t so bad, the larger concern is what Corporate America sees on the horizon.
Expectations for the reporting cycle, which begins with large banks’ outcomes on Friday, are souring, with a stronger greenback, bloated stock ranges and uncertainty over the Federal Reserve’s rate-hiking cycle cited as the primary culprits by analysts at Goldman Sachs and Morgan Stanley. Companies need to navigate by way of a difficult surroundings the place company-specific points are exacerbated by tight monetary circumstances.
Of course some firms will handle to clear an earnings bar that over the previous three months has been lowered by probably the most because the pandemic. But what buyers wish to hear are executives’ views on future development. And on that, the information will most likely be bad.
In the previous six weeks, bellwether corporations like FedEx Corp, Ford Motor Co, Nike Inc, Nvidia Corp, Carnival Corp and Micron Technology Inc have both lowered their forecasts or offered a muted outlook, triggering a double-digit rout most often. Bank of America thinks extra might be on the best way.
When it involves final quarter’s outcomes, “who cares?”, BofA strategists together with Savita Subramanian wrote in a observe to purchasers. “Guidance is going to be terrible. We expect guidance to weaken even further going forward and more downward revisions across the board.”
To Morgan Stanley’s Michael Wilson, a double-whammy of stock oversupply amid slowing demand creates the primary danger this earnings season. The stock drawback is especially acute for shopper retail and IT {hardware} sectors, a Morgan Stanley crew led by Wilson wrote in a observe. That will add additional gas to the continuing slowdown in earnings development, the strategists mentioned.
“Things like inventory, labor costs and other latent expenses are wreaking havoc on cash flow,” strategists mentioned. “The market has started to see cracks with some bellwether stocks reporting both top-line and bottom-line misses in recent weeks.”
To strategists at Goldman Sachs, a surging greenback that’s headed for a sixth straight quarterly advance is creating a giant headache for firms that derive substantial revenues from abroad. The stronger dollar has traditionally been linked to fewer gross sales beats, strategists led by David Kostin wrote in a observe, pointing to Levi Strauss & Co., which missed estimates final week partly as a result of hovering foreign money.
Continued greenback power “would support the performance of stocks with 100% domestic sales relative to those with a higher proportion of foreign sales,” the strategists mentioned. A Goldman basket of shares that generate 100% of revenues domestically has outperformed one which will get 71% of revenues from overseas gross sales in 9 of the ten months by way of September.
Headwinds to margins and tax adjustments will create further challenges, Goldman’s strategists wrote. The Inflation Reduction imposes a 15% minimal tax on company e-book earnings and 1% excise tax on buybacks beginning in 2023.
US firms with home publicity outperform this yr
The S&P 500 Index is down 0.7% on Monday following a 2.8% decline on Friday as merchants brace for the newest spherical of earnings bulletins. More than 60% of the 724 respondents to the newest MLIV Pulse survey say this earnings season will push the S&P 500 Index even decrease. The broad equities benchmark is down 24% this yr.
Sanford C. Bernstein strategists Sarah McCarthy and Mark Diver agree, saying there’s additional draw back to come back for US and European shares, as earnings estimates and funding flows out of fairness funds haven’t reached a backside but.
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“The bear market will not be over until the deteriorating fundamental picture is more fully discounted,” Morgan Stanley’s Wilson wrote within the observe. Sentiment shall be impacted “when companies throw in the towel” or if there’s an exterior monetary shock.
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