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Ahead Of A Subpar Earnings Season: “Investors Are Wary That Companies Might Low-Ball 2023 Guidance”

Ahead Of A Subpar Earnings Season: "Investors Are Wary That Companies Might Low-Ball 2023 Guidance"

Next Friday, financials will kick off…

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9 months ago

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Ahead Of A Subpar Earnings Season: "Investors Are Wary That Companies Might Low-Ball 2023 Guidance"

Next Friday, financials will kick off what is expected to be a lackluster 4Q 2022 earnings season, and by February 10th, companies representing 77% of S&P 500 market cap will have reported year-end results.

According to Goldman's David Kostin, consensus expects the aggregate S&P 500 index will post 0% EPS growth in 4Q 2022 vs. 4Q 2021: i.e., flat, as S&P 500 earnings growth decelerated from +12% in 1Q to just +3% in 3Q. If consensus expectations for 4Q were to materialize, it would represent the weakest quarter of growth since 3Q 2020. However, earnings growth forecasts are disparate at the sector level.

Once again, consensus is most optimistic on Energy EPS (+63%) and most pessimistic on Comm Services (-22%) and Materials (-20%). S&P 500 ex. Energy EPS is expected to fall 5%. Industrials is also expected to post strong growth (+36%), although we recently reiterated our underweight recommendation in the sector due to recent outperformance and decelerating capex in the near term.

Unlike flat EPS, S&P 500 revenues are expected to still grow by 8% year/year, with all sectors positively contributing. That's because according to Kostin, nominal  economic growth has remained strong and explains most of sales growth in Goldman's top-down model. Furthermore, the recent 4% decline in the trade-weighted dollar represented a declining headwind for the translation of foreign sales since approximately 30% of S&P 500 sales are generated internationally (indeed, since the start of 4Q, Goldman's International Sales basket (GSTHINTL) has outperformed the Domestic Sales basket (GSTHAINT) by 16 pp (+21% vs. +5%).)

On the other hand, the outlook for profit margins is deteriorating: S&P 500 margins contracted year/year for the first time in 3Q (-45 bp) and analysts expect this degradation to accelerate in 4Q (-81 bp to 11.2%). At the sector level, Energy is expected to expand margins the most (+364 bp) while Communication Services is expected to contract back to its lowest level since 3Q 2015 (-475 bp to 12.4%). Excluding Energy, S&P 500 margins are estimated to contract 134 bp to 11.0%.

So where does that leave us?

According to Kostin, with 2022 behind us, investors are now primarily focused on the profit outlook for the coming year. As a reminder, Goldman - which has traditionally been dead wrong in its year-ahead market forecasts - expects flat annual EPS growth compared with bottom-up consensus expectations of +3%. The gap reflects the bank's assumption of greater margin compression than consensus expects. Excluding Energy, which benefits from high commodities prices and capital control, the bank expects that S&P 500 profit margins in 2023 will fall by 50 bp to the pre-pandemic levels of 11.3%

Additionally, as per Kostin's recent client conversations, some skeptical investors are wary that managements might low-ball 4Q results and 2023 guidance. This even as more than 20% of S&P 500 market cap has preannounced in 4Q 2022, the highest share since 1Q 2020. Similarly, the 3-month trend of S&P 500 FY2 EPS revision sentiment stands at -31%, the most negative reading outside of the 2008 and 2020 recessions

In his latest Weekly Kickstart notes, Kostin highlights one upside and three downside risks to 2023 EPS... though on net, he sees greater downside risks and expect further negative revisions.

  • 1. Recent easing of China’s zero-COVID policy represents one upside risk to S&P 500 profits via stronger 2023 global growth. A 100 bp increase in world GDP growth would increase Goldman's top-down EPS forecast by 100 bp; at the same time, the bank's China economists estimate that a faster-than-expected exit from zero-COVID suggests weaker near-term growth. TSLA recently reported disappointing vehicle deliveries in 4Q 2022, partly due to softer China demand. However, the new policy has broadly boosted growth expectations for FY 2023. Since the start of 4Q, a basket of stocks with high China sales exposure (GSXUCHSE) has outperformed stocks with high domestic sales exposure (GSTHAINT) by 8 pp (+13% vs. +5%)

  • 2. Weak consumer demand would limit firms’ pricing power and pressure profit margins. Store traffic for the 2022 holiday season remained muted relative to 2019 levels and early sales results point to soft consumer spending. OLLI missed estimates stemming from lower-than-expected customer demand; while DRI’s commentary on the consumer was relatively positive, the deceleration in high-end consumer spending could be early signs of easing demand. Within Info Tech, AAPL was reported to order fewer parts from suppliers and Semis analysts have warned that the demand environment will likely remain impaired for MU through the beginning of 2023. Consumers have also become increasingly incentivized by promotions and higher promotional intensity is expected to pressure gross margins.
  • 3. Corporate tax policies taking effect in 2023 should have a small hit to aggregate S&P 500 earnings, but the impact will vary across sectors. The Inflation Reduction Act imposes a 15% minimum tax on corporate book income and a 1% excise tax on buybacks. These new corporate taxes, however, should reduce aggregate S&P 500 EPS by less than 2%. The minimum tax should reduce S&P 500 EPS by roughly 1%. However, sectors with the lowest effective tax rates, such as Info Tech and Health Care, will face a larger impact. The buyback excise tax would reduce S&P 500 EPS by 0.5%, assuming no change in repurchase activity. The 2017 Tax Cuts and Jobs Act introduced R&D amortization and tighter limits on interest deductibility, which took effect in 2022. Capex deduction will begin to phase out, from 100% to 80% in 2023. Goldman estimates that all these provisions would lower 2023 S&P 500 EPS by 3% if they were to take effect.
  • 4. The biggest risk in 2023 is a potential recession, in which case S&P 500 EPS could fall by 11% to $200 and the index could trough at 3150 (-19%). Goldman Sachs economists assign a 35% probability that the US economy enters a recession during the next 12 months, significantly below the consensus forecast probability of 65%. The bank had previously outlined a recession earnings scenario, which assumes the US economy modestly contracts. Concentrated sector weakness could lead to larger EPS declines than its current forecast. For example, S&P 500 EPS fell by 20% in 1990 mainly due to Autos, 23% in 2001 due to Info Tech, and 45% in 2008 due to Financials. The next chart shows a breakdown of bottom-up consensus and our top-down baseline and recession 2023 EPS forecasts by sector.

More in the full note available to pro subs.

Tyler Durden Mon, 01/09/2023 - 06:55

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International

Von Der Leyen Speech Suggests Russia Dropped Nuke On Hiroshima 

Von Der Leyen Speech Suggests Russia Dropped Nuke On Hiroshima 

Von der Leyen just said what?…

This past Wednesday, President of the European…

Published

3 hours ago

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September 24, 2023

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Von Der Leyen Speech Suggests Russia Dropped Nuke On Hiroshima 

Von der Leyen just said what?...

This past Wednesday, President of the European Commission Ursula von der Leyen delivered a speech before the 2023 Atlantic Council Awards in New York, where she sounded the alarm over the specter of nuclear war centered on the Russia-Ukraine conflict. But while invoking remembrance of the some 78,000 civilians killed instantly by the atomic bomb dropped on Hiroshima at the end of WWII, she said her warning comes "especially at a time when Russia threatens to use nuclear weapons once again". She  actually framed the atomic atrocity in a way that made it sound like the Russians did it. Watch:

There was not one single acknowledgement in Von der Leyen's speech that it was in fact the United States which incinerated and maimed hundreds of thousands when it dropped no less that two atomic bombs on Japanese cities.

Here were her precise words, according to an Atlantic Council transcript...

You, dear Prime Minister, showed me the meaning of this proverb during the G7 summit in Japan last year. You brought us to your hometown of Hiroshima, the place where you have your roots and which has deeply shaped your life and leadership. Many of your relatives lost their life when the atomic bomb razed Hiroshima to the ground. You have grown up with the stories of the survivors. And you wanted us to listen to the same stories, to face the past, and learn something about the future.

It was a sobering start to the G7, and one that I will not forget, especially at a time when Russia threatens to use nuclear weapons once again. It is heinous. It is dangerous. And in the shadow of Hiroshima, it is unforgivable. 

The above video of that segment of the speech gives a better idea of the subtle way she closely associated in her rhetoric the words "once again" with the phrase "shadow of Hiroshima" while focusing on what Russia is doing, to make it sound like it was Moscow behind the past atrocities.

Via dpa

Russian media not only picked up on the woefully misleading comments, but the Kremlin issued a formal rebuke of Von der Leyen's speech as well:

In response to von der Leynen's remarks, Russian Foreign Ministry spokeswoman Maria Zakharova accused the European Commission president of making "no mention whatsoever of the US and its executioners who dropped the bombs on populated Japanese cities."

Zakharova responded on social media, arguing that von der Leyen's assertions on Moscow's supposed intentions to employ nuclear weapons "is despicable and dangerous" and "lies."

Some Russian embassies in various parts of the globe also highlighted the speech on social media, denouncing the "empire of lies" and those Western leaders issuing 'shameful' propaganda and historical revisionism.

Tyler Durden Sun, 09/24/2023 - 13:15

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International

Saudi Arabia Sentences Schoolgirl To 18 Years In Prison Over Tweets

Saudi Arabia Sentences Schoolgirl To 18 Years In Prison Over Tweets

Via Middle East Eye,

Saudi Arabia has sentenced a secondary schoolgirl…

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4 hours ago

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September 24, 2023

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Saudi Arabia Sentences Schoolgirl To 18 Years In Prison Over Tweets

Via Middle East Eye,

Saudi Arabia has sentenced a secondary schoolgirl to 18 years in jail and a travel ban for posting tweets in support of political prisoners, according to a rights group.

On Friday, ALQST rights group, which documents human rights abuses in Saudi Arabia, revealed that the Saudi Specialised Criminal Court handed out the sentence in August to 18-year-old Manal al-Gafiri, who was only 17 at the time of her arrest.

Via Reuters

The Saudi judiciary, under the de facto rule of Crown Prince Mohammed bin Salman, has issued several extreme prison sentences over cyber activism and the use of social media for criticising the government.

They include the recent death penalty against Mohammed al-Ghamdi, a retired teacher, for comments made on Twitter and YouTube, and the 34-year sentence of Leeds University doctoral candidate Salma al-Shehab over tweets last year.

The crown prince confirmed Ghamdi's sentence during a wide-ranging interview with Fox News on Wednesday. He blamed it on "bad laws" that he cannot change. 

"We are not happy with that. We are ashamed of that. But [under] the jury system, you have to follow the laws, and I cannot tell a judge [to] do that and ignore the law, because... that's against the rule of law," he said.

Saudi human rights defenders and lawyers, however, disputed Mohammed bin Salman's allegations and said the crackdown on social media users is correlated with his ascent to power and the introduction of new judicial bodies that have since overseen a crackdown on his critics. 

"He is able, with one word or the stroke of a pen, in seconds, to change the laws if he wants," Taha al-Hajji, a Saudi lawyer and legal consultant with the European Saudi Organisation for Human Rights, told Middle East Eye this week.

According to Joey Shea, Saudi Arabia researcher at Human Rights Watch, Ghamdi was sentenced under a counterterrorism law passed in 2017, shortly after Mohammed bin Salman became crown prince. The law has been criticised for its broad definition of terrorism.

Similarly, two new bodies - the Presidency of State Security and the Public Prosecution Office - were established by royal decrees in the same year.

Rights groups have said that the 2017 overhaul of the kingdom's security apparatus has significantly enabled the repression of Saudi opposition voices, including those of women rights defenders and opposition activists. 

"These violations are new under MBS, and it's ridiculous that he is blaming this on the prosecution when he and senior Saudi authorities wield so much power over the prosecution services and the political apparatus more broadly," Shea said, using a common term for the prince.

Tyler Durden Sun, 09/24/2023 - 11:30

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Biden To Join UAW Picket Line As Strike Expands, Good Luck Getting Repairs

Biden To Join UAW Picket Line As Strike Expands, Good Luck Getting Repairs

Authored by Mike Shedlock via MishTalk.com,

In a symbolic, photo-op…

Published

5 hours ago

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September 24, 2023

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Biden To Join UAW Picket Line As Strike Expands, Good Luck Getting Repairs

Authored by Mike Shedlock via MishTalk.com,

In a symbolic, photo-op gesture to win union votes, Biden will head to Michigan for a token visit.

Biden to Walk the Picket Line

Taking Sides

CNN had some Interesting comments on Biden Talking Sides.

Jeremi Suri, a presidential historian and professor at University of Texas at Austin, said he doesn’t believe any president has ever visited a picket line during a strike.

Presidents, including Biden, have previously declined to wade into union disputes to avoid the perception of taking sides on issues where the negotiating parties are often engaged in litigation.

On September 15, the day the strike started, Biden said that the automakers “should go further to ensure record corporate profits mean record contracts for the UAW.”

Some Democratic politicians have been urging Biden to do more. California Rep. Ro Khanna on Monday told CNN’s Vanessa Yurkevich that Biden and other Democrats should join him on the picket line.

“I’d love to see the president out here,” he said, arguing the Democratic Party needs to demonstrate it’s “the party of the working class.”

UAW Announces New Strike Locations

As the strike enters a second week, UAW Announces New Strike Locations

UAW President Shawn Fain called for union members to strike at noon ET Friday at 38 General Motors and Stellantis facilities across 20 states. He said the strike call covers all of GM and Stellantis’ parts distribution facilities.

The strike call notably excludes Ford, the third member of Detroit’s Big Three, suggesting the UAW is more satisfied with the progress it has made on a new contract with that company.

General Motors plants being told to strike are in Pontiac, Belleville, Ypsilanti, Burton, Swartz Creek and Lansing, Michigan; West Chester, Ohio; Aurora, Colorado; Hudson, Wisconsin; Bolingbrook, Illinois; Reno, Nevada; Rancho Cucamonga, California; Roanoke, Texas; Martinsburg, West Virginia; Brandon, Mississippi; Charlotte, North Carolina; Memphis, Tennessee; and Lang Horne, Pennsylvania.

The Stellantis facilities going on strike are in Marysville, Center Line, Warren, Auburn Hills, Romulus and Streetsboro, Michigan; Milwaukee, Wisconsin; Plymouth, Minnesota; Commerce City, Colorado; Naperville, Illinois; Ontario, California; Beaverton, Oregon; Morrow, Georgia; Winchester, Virginia; Carrollton, Texas; Tappan, New York; and Mansfield, Massachusetts.

Contract Negotiations Are Not Close

Good Luck Getting Repairs

Party of the Working Cass, Really?

Let’s discuss the nonsensical notion that Democrats are the party of the “working class”.

Unnecessary stimulus, reckless expansion of social services, student debt cancellation, eviction moratoriums, earned income credits, immigration policy, and forcing higher prices for all, to benefit the few, are geared towards the “unworking class”.

On top of it, Biden wants to take away your gas stove, end charter schools to protect incompetent union teachers, and force you into an EV that you do not want and for which infrastructure is not in place.

All of this increases inflation across the board as do sanctions and clean energy madness.

Exploring the Working Class Idea

If you don’t work and have no income, Biden may make your healthcare cheaper. If you do work, he seeks to take your healthcare options away.

If you want to pay higher prices for cars, give up your gas stove, be forced into an EV, subsidize wind energy then pay more for electricity on top of it, you have a clear choice. If you support those efforts, by all means, please join him on the picket line for a token photo-op (not that you will be able to get within miles for the staged charade).

But if you can think at all, you understand Biden does not support the working class, he supports the unworking class.

Tyler Durden Sun, 09/24/2023 - 10:30

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