Better-Than-Feared Earnings Has Analysts Rethinking Projections

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(Bloomberg) — It’s still early in earnings season, but results so far are coming in strong enough that some on Wall Street are starting to wonder if they’re too pessimistic about corporate performance in America.

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Nearly 20% of the S&P 500 reported quarterly earnings and more than 77% of the reports were better than expected, according to data from Bloomberg Intelligence. Strong results from the country’s huge banks, and better-than-frightening results from smaller lenders, drive a strong start to the first-quarter earnings season.

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“We’ve seen a significant number of names reported to date that have exceeded expectations, and that’s encouraging,” said Mike Lowengart, head of model portfolio creation for the Global Investment Desk at Morgan Stanley. “It begs the question: Were expectations set too low on purpose, and are they still too low?”

The overall strength in results so far has Bank of America strategists led by Savita Subramanian pondering whether their $200 2023 EPS target for the S&P 500 is too bleak, according to a note to clients this week. The consensus earnings forecast for S&P companies over the next 12 months is $219 a share, according to data compiled by Bloomberg.

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Part of the reason for the earnings strategists’ miscalculation may be that a highly anticipated earnings recession has already been brewing under the surface for nearly a year – and may be coming to an end.

Earnings recession is usually defined as two consecutive quarters of corporate earnings below their level a year ago. Excluding energy, which baffled estimates for the broader index last year due to higher commodity prices and higher inflation, the S&P 500’s earnings have fallen year over year since the second quarter of 2022, according to Bloomberg Intelligence.

“Investors are looking ahead, and a lot of the ‘slump earnings’ story has already been priced in, so forward guidance is much more important,” said Ken Schwan, head of data science research at Fundstrat Global Advisors, referring to the 15%. The rally in the S&P 500 since the October low.

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However, the economy is starting to show some signs of cracking, and guidance will be key from here. For example, JB Hunt Transport Services Inc. The trucking giant is out of a “freight slump,” a sign that the economic downturn may be becoming more apparent in results from outside the financial sector.

I’m more interested in companies that have a benchmark of the state of US corporate spending,” said Brad Conger, deputy chief investment officer of Hertel Callahan & Co.

Marginal hopes

Still, there are reasons for optimism, as broad earnings growth is expected to pick back up in the second half of the year thanks in part to what could be the end of margin pain.

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Operating margins are a key measure of profitability and have a strong track record of indicating where US equity prices are headed. They have been scaled back during the pandemic due to excess inventory, supply chain bustle and escalating costs.

But operating margins appear to have softened in the first quarter, as the annual rate of increase in prices paid by producers of goods fell below that for consumers by the most since 2009 in March. This is a sign that the decline in operating margin estimates for the S&P 500 is already behind us, according to Bloomberg Intelligence.

More importantly for the market and the world at large, the worst stresses in the banking industry seem to be over. Major money center lenders reported good results last quarter, with JPMorgan Chase & Co., Citigroup, Wells Fargo & Co. and Bank of America Corp. thriving in a rising interest rate environment.

Meanwhile, regional lenders such as Trust Financial Corp. And Fifth Third Bancorp that deposits remained largely stable during the March turmoil. Western Alliance Bancorp said its deposits had recovered after the collapse of three of its peers last month.

BI senior analyst Wendy Song said the financial sector was “the strongest leading indicator this quarter”.

Other beleaguered regional banks report next week, including First Republic Bank on Monday and PacWest Bancorp on Tuesday.