According to American Century Investments senior client portfolio manager Jonathan Bauman, 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,” Mr Bauman said.
On the back of continued monetary policy tightening and persistently high inflation, the third quarter of 2022 saw corporate earnings slow further. While 69 per cent of US companies beat analysts’ earnings expectations, that was down from the previous quarter and below the long-term average. In Europe, only 61 per cent of companies exceeded expectations.
In the US, the Q3 earnings growth rate was 2.2 per cent. However, without the energy sector propping it up, the growth rate would have dropped by more than 5 per cent. The energy sector was similarly strong in Europe, with overall profit growth of 22 per cent dropping to 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,” Mr Bauman said.
Supply constraints in Europe have led to revenue growth. However, with consumer demand weakening and supply chain issues finally abating, American Century Investments said many companies may find themselves with high levels of inventory, making it harder to pass costs and maintain their profit margins.
These overstocked inventories will continue to affect company earnings during the fourth quarter and in 2023. The firm predicts heavy discounting across many consumer industries, with the overordering that became commonplace during the pandemic when supply was tight now coming back to bite many companies.
Higher rates are having a mixed impact on the financial sector, with banks leveraged to deposits and lending benefitting while declining deal-making activity has hurt those with heavier exposure to investment banking.
“We’re also seeing loan loss provisions rise in anticipation of tougher economic conditions, a turnaround from muted provisions a year ago,” Mr Bauman said.
He also predicts that things are likely to get worse before they get better, adding that a recent estimate has US profit growth falling 1.7 per cent compared with 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-19 shock),” Mr Bauman said.
