MEDIA RELEASE: Earnings growth for the fourth quarter of 2022 and calendar year 2023 in the US and Europe is likely to disappoint, according to American Century Investments senior client portfolio manager, Jonathan Bauman.
"So far, forecasts for 2023 earnings growth for the S&P 500 remain positive, though lower. The consensus estimates may prove too optimistic, however, as slowing economic growth and higher inflation expectations may take a bigger bite out of US company earnings," Bauman said.
Corporate earnings slowed further in the third quarter of 2022 as monetary policy continued to tighten in response to ongoing higher inflation. In the US, 69 per cent of companies beat analysts' earnings expectations but that was less than the previous quarter and lagged the long-term average. Just 61 per cent of European companies exceeded expectations.
In the US, the quarter three earnings growth rate was 2.2 per cent but with the removal of the energy sector, the growth rate would have dropped by more than 5 per cent. In Europe, overall profit growth of 22 per cent would have been just 7 per cent if energy sector data was excluded.
"The S&P 500 profit margin was 11.9 per cent, down slightly from the same quarter last year. Looking closer, however, strength in the energy sector is again masking weakness almost everywhere else. More than half the companies in each sector reported lower profit margins outside energy and industrials," Bauman said.
In Europe revenue growth has been strong due to supply constraints. However, consumer demand is weakening and with supply chain issues finally abating, many companies may find themselves with high levels of inventory, making it harder to pass costs and maintain their profit margins.
Overstocked inventories will continue to weigh on company earnings during the fourth quarter and into next year. Many companies became used to overordering during the pandemic when supply was tight, and this practice has now come back to bite them, with heavy discounting likely across many consumer industries.
In the financial sector higher rates are having a mixed impact. Banks leveraged to deposits and lending have so far benefited while those with a heavier exposure to investment banking have been hurt by declining deal making activity.
"We're also seeing loan loss provisions rise in anticipation of tougher economic conditions, a turnaround from muted provisions a year ago," Bauman said.
Things are likely to get worse before they get better. One recent estimate has US profit growth falling 1.7 per cent compared to a year ago and in Europe the earnings downgrade cycle has already started.
"While consensus expectations for Stoxx 600 EPS growth in 2022 remain near a record high, those for 2023 have fallen to the lowest level since 2009 (excluding the 2020 COVID shock)," Bauman said.
Given the uncertain outlook now is a good time for investors to start following a 'recession playbook' and bunkering down for tougher times.
