As Wall Street pushed stocks higher to start 2023, earnings expectations sank by almost the same amount

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As the S&P 500 index eked out gains in the first quarter, analysts and dozens of companies grew more pessimistic about their earnings by almost the same percentage, as higher prices and fissures in the banking system sharpened fears of a downturn.

As the weather front of first-quarter earnings reports approaches, Wall Street analysts expect first-quarter per-share profit for companies in the S&P 500
to fall 6.6%, according to a report from FactSet released on Friday. That would be the biggest drop since the second quarter of 2020, when the pandemic’s toll on the economy was at its worst and sent earnings 31.8% lower.

Analysts have also cut their first-quarter estimates on the bottom line at a steeper rate than average. From Dec. 31 to March 30, analysts lowered their earnings-per-share estimates by 6.3%. Analysts typically temper those forecasts over a given quarter as financial realities emerge, but in the past five years, that average decline during a quarter has been only 2.8%, FactSet said.

“Given the continuing concerns in the market about bank liquidity and a possible broader economic recession, did analysts lower EPS estimates more than normal for S&P 500 companies for the first quarter? The answer is yes,” FactSet Senior Earnings Analyst John Butters wrote Friday.

For more: An earnings recession seems inevitable, but it might not last long

And while investors managed to push the S&P 500 index 6.7% higher through the first quarter, more executives than normal have tried to temper those investors’ expectations. Seventy-nine companies in the S&P 500 so far have put out downbeat earnings forecasts, above the average tallied over five years, according to FactSet.

The dimmer sentiment on corporate earnings comes as Wall Street worries about the impact of higher prices and higher interest rates on the economy. Many businesses have raised prices to cover costs and protect or pad their bottom lines, following an initial round of supply shocks in 2021 and 2022 related to COVID-19’s squeeze on supply chains and the war in Ukraine. Some analysts have said those efforts to guard profit margins — via higher prices — have played a large role in pumping up inflation overall.

Then regulators swooped in to protect deposits at Silicon Valley Bank and Signature Bank after they collapsed last month, while the nation’s biggest banks gave First Republic Bank
a multibillion-dollar infusion. Abroad, Credit Suisse Group AG
struck a deal to borrow up to $54 billion from the Swiss central bank.

See also: Bank stocks whipsawed, but bank profit estimates barely budged

Not everyone agrees when, or if, a recession might hit, and whether a rebound might arrive in the second half of the year. But analysts at Oxford Economics, in a note on Thursday, said borrowing money could become more difficult for people looking for a loan.

“Looking ahead, the economy will face the full brunt of tighter credit conditions and Fed policy this year, and inflation is set to stay above its historical trend,” they said.

“The recent banking-sector turmoil will affect the economy mainly through tighter lending standards and a reduction in the availability of credit,” they continued. “We expect a recession to hit in the second half of 2023, with a peak-to-trough GDP decline of around 1.5%.”

However, despite the banking ruptures, Wall Street has remained blasé on the potential impact on financial-industry profits. FactSet expects earnings from the financial sector to grow 3.2% during the first quarter. And it expects the sector to lead the S&P 500 overall on revenue growth, with gains of 9.1%.

More broadly, online retail giant Inc.
was seen leading a rebound in the consumer discretionary sector, FactSet said, after higher prices in 2022 forced more shoppers to spend their savings on essentials like gas, rent and groceries — rather than things online. Profit gains were also expected in energy, which has benefited from higher oil prices.

Four S&P 500 companies will report first-quarter results in the week ahead. The highlights for the week center on food, where prices have stayed high, and clothing, where discounts have proliferated.

The calls to put on your calendar

Are jeans a commodity? Jeans maker Levi Strauss & Co.
reports results on Thursday, and the results could serve as a proxy for what clothing people still want as higher prices stretch budgets. The company will report earnings after retailers cut prices on clothing in an effort to tighten up bloated inventories, following last year’s sharp turn in consumer spending toward more basic needs.

Some analysts have said that demand for denim is slowing, with signs that chinos and cargo pants have fallen more into favor as people return to offices and formal occasions. Others have said that customers were likelier to seek out cheaper alternatives for things like jeans. Levi’s executives disagree. But some analysts have said there’s room for clothing prices to drop further, as shoppers remain cautious about the economy.

The numbers to watch

Food prices, and the food industry’s command over them: After Russia’s invasion of Ukraine more than a year ago initially disrupted global oil and grain supplies, food prices have stayed higher. Industry executives say customers haven’t pushed back — not that those customers have much of a choice for essentials like groceries. Some of those producers have made more money by hiking prices while selling fewer actual goods — a practice that not all investors believe is sustainable. Results from packaged and frozen-food producer Conagra Brands Inc.
due Wednesday, along with frozen-potato and French-fry maker Lamb Weston Holdings Inc.
on Thursday, could offer more of a sense of where profits, volumes, prices and costs are headed and to what degree they’re diverging.

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