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US Perspectives - Fundamentals are shifting
- In 2023, US corporate profits are expected to be downgraded materially. Weaker real economic growth should reduce volumes, while continued disinflation should tighten margins. The combination of those two factors should result in a downgrade of expectations for corporate earnings this year
- The fourth quarter earnings season is well underway, and so far, has disappointed even the meager results that were anticipated. Through the close on January 30, almost 30 per cent of the S&P 500 companies have reported earnings. Only 69 per cent of the companies have beaten earnings expectations, which is well below the 5-year average of 77 per cent and the 10-year average of 73 per cent
- FactSet consensus forecasts earnings declines for the first half of 2023 but improves operating earnings growth for the second half of the year. Their consensus view is that analysts are projecting earnings declines of -3.0 per cent and -2.4 per cent in the first two quarters from the same period in 2022. In the second half of the year, analysts are projecting earnings growth of 3.7 per cent and 10.3 per cent, in the third and fourth quarters
- According to FactSet, so far, the net profit margin for the S&P 500 in 4Q 2022 is 11.4 per cent. This is below the previous quarter’s margin of 11.9 per cent and below the year-ago net profit margin of 12.4 per cent. If the margin contraction remains in place, it could mark the sixth consecutive quarter in which margins have declined on a quarter-over-quarter basis
- In the long term, we remain optimistic about the return prospects in US equity markets. US equity investors will benefit from the expected pause in the Fed’s monetary policy tightening cycle. However, investors must recalibrate earnings expectations to reflect the anticipated slowdown in the economy, and the continued tightening of corporate profit margins due to the persistent disinflation underway
- Once the 2023 earnings downgrades have been fully priced into the market, we can then begin to look ahead and recalibrate upwards US equity valuations, given the better prospects for economic growth and earnings as we head towards 2024