Before we can finally say goodbye (and good riddance?) to 2022 we have the small matter of Q4 earnings season. This gets going on January 13th, as several large US banks and others, report on their performance over the last three months of the year.
Opinions about what we can expect are mixed, with Wall Street analysts reducing their forecasts, for both revenue and earnings in many cases. Thanks to a combination of rising interest rates and higher prices, which may have limited consumer spending over the key holiday season.
On average analysts expect earnings among S&P500 constituents to fall by -6.50% and for overall profits, among the group, to rise by just +4.70% for 2023 as a whole.
A figure that’s well below the current rate of inflation in the US.
Much of that rise in profitability is likely to be attributable to one sector, the energy stocks. Where year-over-year earnings growth is expected to come in at an impressive +63%.
Though with oil and gas prices well off their recent highs, this could be the last quarter for such excessive outperformance from the sector.
The S&P 500 energy sector is up by over +45% in the last 52 weeks, falling oil prices and year-end profit-taking have seen the sector fall back from its mid-November highs, however.
Whilst it's common for analysts to trim their numbers ahead of earnings season. The forecast for a -6.50% decline in earnings among the S&P stocks is far larger than the twenty-year, or eighty-quarter average of -3.80%.
What’s more, -6.50% is also the largest individual, in-quarter reduction in earnings estimates, seen over the last 20 years.
In short, then Wall Street is bearish on earnings in the last quarter of 2022 and in some cases extremely so. Cutting EPS or earnings per shares forecasts for some sectors by double-digit percentages. For example, analysts slashed their forecast for the Materials sector by -18.8%, Consumer Discretionary by -13.5%, and Communication Services by -11.8%.
Forecasts and price action out of synch
That has created something of a dichotomy because equity indices in the US are buoyant right now, and 71 of the stocks within the S&P 100 index are currently trading above their 50-day moving average.
Trading above the 50-day MA line is viewed by technical traders as a sign of positive pre-earnings momentum. Or to put that another way the market believes that these stocks can surprise to the upside.
What’s more the average 5-day percentage change in these 71 stocks (as of the time of writing) is +4.52%, and the median change is +3.72%. Which doesn't sound like the price action you would expect to find, in a group of stocks that were set to disappoint.
The truth is that analyst expectations for Q4 earnings have been trimmed so much, that they have created an extremely low hurdle for companies to get over.
Somewhat counter-intuitively, inflation allowed US companies to raise prices and increase their profit margins. however, higher costs may now have caught up with corporate America and expectations are for a -4.0% decline in profit margins among the S&P 500 stocks.
Source JP Morgan
Having had several years of stocks moving collectively en masse it seems likely that we will now have to look at equities individually assessing their management performance finances and USPs to identify trading opportunities.
The advantage that we have of course is that CFDs allow us to trade both long and short meaning we can back winners and bet against the weaker performers.
Source JP Morgan
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