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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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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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Health Officials: Man Dies From Bubonic Plague In New Mexico

Health Officials: Man Dies From Bubonic Plague In New Mexico

Authored by Jack Phillips via The Epoch Times (emphasis ours),

Officials in…

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Health Officials: Man Dies From Bubonic Plague In New Mexico

Authored by Jack Phillips via The Epoch Times (emphasis ours),

Officials in New Mexico confirmed that a resident died from the plague in the United States’ first fatal case in several years.

A bubonic plague smear, prepared from a lymph removed from an adenopathic lymph node, or bubo, of a plague patient, demonstrates the presence of the Yersinia pestis bacteria that causes the plague in this undated photo. (Centers for Disease Control and Prevention/Getty Images)

The New Mexico Department of Health, in a statement, said that a man in Lincoln County “succumbed to the plague.” The man, who was not identified, was hospitalized before his death, officials said.

They further noted that it is the first human case of plague in New Mexico since 2021 and also the first death since 2020, according to the statement. No other details were provided, including how the disease spread to the man.

The agency is now doing outreach in Lincoln County, while “an environmental assessment will also be conducted in the community to look for ongoing risk,” the statement continued.

This tragic incident serves as a clear reminder of the threat posed by this ancient disease and emphasizes the need for heightened community awareness and proactive measures to prevent its spread,” the agency said.

A bacterial disease that spreads via rodents, it is generally spread to people through the bites of infected fleas. The plague, known as the black death or the bubonic plague, can spread by contact with infected animals such as rodents, pets, or wildlife.

The New Mexico Health Department statement said that pets such as dogs and cats that roam and hunt can bring infected fleas back into homes and put residents at risk.

Officials warned people in the area to “avoid sick or dead rodents and rabbits, and their nests and burrows” and to “prevent pets from roaming and hunting.”

“Talk to your veterinarian about using an appropriate flea control product on your pets as not all products are safe for cats, dogs or your children” and “have sick pets examined promptly by a veterinarian,” it added.

“See your doctor about any unexplained illness involving a sudden and severe fever, the statement continued, adding that locals should clean areas around their home that could house rodents like wood piles, junk piles, old vehicles, and brush piles.

The plague, which is spread by the bacteria Yersinia pestis, famously caused the deaths of an estimated hundreds of millions of Europeans in the 14th and 15th centuries following the Mongol invasions. In that pandemic, the bacteria spread via fleas on black rats, which historians say was not known by the people at the time.

Other outbreaks of the plague, such as the Plague of Justinian in the 6th century, are also believed to have killed about one-fifth of the population of the Byzantine Empire, according to historical records and accounts. In 2013, researchers said the Justinian plague was also caused by the Yersinia pestis bacteria.

But in the United States, it is considered a rare disease and usually occurs only in several countries worldwide. Generally, according to the Mayo Clinic, the bacteria affects only a few people in U.S. rural areas in Western states.

Recent cases have occurred mainly in Africa, Asia, and Latin America. Countries with frequent plague cases include Madagascar, the Democratic Republic of Congo, and Peru, the clinic says. There were multiple cases of plague reported in Inner Mongolia, China, in recent years, too.

Symptoms

Symptoms of a bubonic plague infection include headache, chills, fever, and weakness. Health officials say it can usually cause a painful swelling of lymph nodes in the groin, armpit, or neck areas. The swelling usually occurs within about two to eight days.

The disease can generally be treated with antibiotics, but it is usually deadly when not treated, the Mayo Clinic website says.

“Plague is considered a potential bioweapon. The U.S. government has plans and treatments in place if the disease is used as a weapon,” the website also says.

According to data from the U.S. Centers for Disease Control and Prevention, the last time that plague deaths were reported in the United States was in 2020 when two people died.

Tyler Durden Wed, 03/13/2024 - 21:40

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Riley Gaines Explains How Women’s Sports Are Rigged To Promote The Trans Agenda

Riley Gaines Explains How Women’s Sports Are Rigged To Promote The Trans Agenda

Is there a light forming when it comes to the long, dark and…

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Riley Gaines Explains How Women's Sports Are Rigged To Promote The Trans Agenda

Is there a light forming when it comes to the long, dark and bewildering tunnel of social justice cultism?  Global events have been so frenetic that many people might not remember, but only a couple years ago Big Tech companies and numerous governments were openly aligned in favor of mass censorship.  Not just to prevent the public from investigating the facts surrounding the pandemic farce, but to silence anyone questioning the validity of woke concepts like trans ideology. 

From 2020-2022 was the closest the west has come in a long time to a complete erasure of freedom of speech.  Even today there are still countries and Europe and places like Canada or Australia that are charging forward with draconian speech laws.  The phrase "radical speech" is starting to circulate within pro-censorship circles in reference to any platform where people are allowed to talk critically.  What is radical speech?  Basically, it's any discussion that runs contrary to the beliefs of the political left.

Open hatred of moderate or conservative ideals is perfectly acceptable, but don't ever shine a negative light on woke activism, or you might be a terrorist.

Riley Gaines has experienced this double standard first hand.  She was even assaulted and taken hostage at an event in 2023 at San Francisco State University when leftists protester tried to trap her in a room and demanded she "pay them to let her go."  Campus police allegedly witnessed the incident but charges were never filed and surveillance footage from the college was never released.  

It's probably the last thing a champion female swimmer ever expects, but her head-on collision with the trans movement and the institutional conspiracy to push it on the public forced her to become a counter-culture voice of reason rather than just an athlete.

For years the independent media argued that no matter how much we expose the insanity of men posing as women to compete and dominate women's sports, nothing will really change until the real female athletes speak up and fight back.  Riley Gaines and those like her represent that necessary rebellion and a desperately needed return to common sense and reason.

In a recent interview on the Joe Rogan Podcast, Gaines related some interesting information on the inner workings of the NCAA and the subversive schemes surrounding trans athletes.  Not only were women participants essentially strong-armed by colleges and officials into quietly going along with the program, there was also a concerted propaganda effort.  Competition ceremonies were rigged as vehicles for promoting trans athletes over everyone else. 

The bottom line?  The competitions didn't matter.  The real women and their achievements didn't matter.  The only thing that mattered to officials were the photo ops; dudes pretending to be chicks posing with awards for the gushing corporate media.  The agenda took precedence.

Lia Thomas, formerly known as William Thomas, was more than an activist invading female sports, he was also apparently a science project fostered and protected by the athletic establishment.  It's important to understand that the political left does not care about female athletes.  They do not care about women's sports.  They don't care about the integrity of the environments they co-opt.  Their only goal is to identify viable platforms with social impact and take control of them.  Women's sports are seen as a vehicle for public indoctrination, nothing more.

The reasons why they covet women's sports are varied, but a primary motive is the desire to assert the fallacy that men and women are "the same" psychologically as well as physically.  They want the deconstruction of biological sex and identity as nothing more than "social constructs" subject to personal preference.  If they can destroy what it means to be a man or a woman, they can destroy the very foundations of relationships, families and even procreation.  

For now it seems as though the trans agenda is hitting a wall with much of the public aware of it and less afraid to criticize it.  Social media companies might be able to silence some people, but they can't silence everyone.  However, there is still a significant threat as the movement continues to target children through the public education system and women's sports are not out of the woods yet.   

The ultimate solution is for women athletes around the world to organize and widely refuse to participate in any competitions in which biological men are allowed.  The only way to save women's sports is for women to be willing to end them, at least until institutions that put doctrine ahead of logic are made irrelevant.          

Tyler Durden Wed, 03/13/2024 - 17:20

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Congress’ failure so far to deliver on promise of tens of billions in new research spending threatens America’s long-term economic competitiveness

A deal that avoided a shutdown also slashed spending for the National Science Foundation, putting it billions below a congressional target intended to…

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Science is again on the chopping block on Capitol Hill. AP Photo/Sait Serkan Gurbuz

Federal spending on fundamental scientific research is pivotal to America’s long-term economic competitiveness and growth. But less than two years after agreeing the U.S. needed to invest tens of billions of dollars more in basic research than it had been, Congress is already seriously scaling back its plans.

A package of funding bills recently passed by Congress and signed by President Joe Biden on March 9, 2024, cuts the current fiscal year budget for the National Science Foundation, America’s premier basic science research agency, by over 8% relative to last year. That puts the NSF’s current allocation US$6.6 billion below targets Congress set in 2022.

And the president’s budget blueprint for the next fiscal year, released on March 11, doesn’t look much better. Even assuming his request for the NSF is fully funded, it would still, based on my calculations, leave the agency a total of $15 billion behind the plan Congress laid out to help the U.S. keep up with countries such as China that are rapidly increasing their science budgets.

I am a sociologist who studies how research universities contribute to the public good. I’m also the executive director of the Institute for Research on Innovation and Science, a national university consortium whose members share data that helps us understand, explain and work to amplify those benefits.

Our data shows how underfunding basic research, especially in high-priority areas, poses a real threat to the United States’ role as a leader in critical technology areas, forestalls innovation and makes it harder to recruit the skilled workers that high-tech companies need to succeed.

A promised investment

Less than two years ago, in August 2022, university researchers like me had reason to celebrate.

Congress had just passed the bipartisan CHIPS and Science Act. The science part of the law promised one of the biggest federal investments in the National Science Foundation in its 74-year history.

The CHIPS act authorized US$81 billion for the agency, promised to double its budget by 2027 and directed it to “address societal, national, and geostrategic challenges for the benefit of all Americans” by investing in research.

But there was one very big snag. The money still has to be appropriated by Congress every year. Lawmakers haven’t been good at doing that recently. As lawmakers struggle to keep the lights on, fundamental research is quickly becoming a casualty of political dysfunction.

Research’s critical impact

That’s bad because fundamental research matters in more ways than you might expect.

For instance, the basic discoveries that made the COVID-19 vaccine possible stretch back to the early 1960s. Such research investments contribute to the health, wealth and well-being of society, support jobs and regional economies and are vital to the U.S. economy and national security.

Lagging research investment will hurt U.S. leadership in critical technologies such as artificial intelligence, advanced communications, clean energy and biotechnology. Less support means less new research work gets done, fewer new researchers are trained and important new discoveries are made elsewhere.

But disrupting federal research funding also directly affects people’s jobs, lives and the economy.

Businesses nationwide thrive by selling the goods and services – everything from pipettes and biological specimens to notebooks and plane tickets – that are necessary for research. Those vendors include high-tech startups, manufacturers, contractors and even Main Street businesses like your local hardware store. They employ your neighbors and friends and contribute to the economic health of your hometown and the nation.

Nearly a third of the $10 billion in federal research funds that 26 of the universities in our consortium used in 2022 directly supported U.S. employers, including:

  • A Detroit welding shop that sells gases many labs use in experiments funded by the National Institutes of Health, National Science Foundation, Department of Defense and Department of Energy.

  • A Dallas-based construction company that is building an advanced vaccine and drug development facility paid for by the Department of Health and Human Services.

  • More than a dozen Utah businesses, including surveyors, engineers and construction and trucking companies, working on a Department of Energy project to develop breakthroughs in geothermal energy.

When Congress shortchanges basic research, it also damages businesses like these and people you might not usually associate with academic science and engineering. Construction and manufacturing companies earn more than $2 billion each year from federally funded research done by our consortium’s members.

A lag or cut in federal research funding would harm U.S. competitiveness in critical advanced technologies such as artificial intelligence and robotics. Hispanolistic/E+ via Getty Images

Jobs and innovation

Disrupting or decreasing research funding also slows the flow of STEM – science, technology, engineering and math – talent from universities to American businesses. Highly trained people are essential to corporate innovation and to U.S. leadership in key fields, such as AI, where companies depend on hiring to secure research expertise.

In 2022, federal research grants paid wages for about 122,500 people at universities that shared data with my institute. More than half of them were students or trainees. Our data shows that they go on to many types of jobs but are particularly important for leading tech companies such as Google, Amazon, Apple, Facebook and Intel.

That same data lets me estimate that over 300,000 people who worked at U.S. universities in 2022 were paid by federal research funds. Threats to federal research investments put academic jobs at risk. They also hurt private sector innovation because even the most successful companies need to hire people with expert research skills. Most people learn those skills by working on university research projects, and most of those projects are federally funded.

High stakes

If Congress doesn’t move to fund fundamental science research to meet CHIPS and Science Act targets – and make up for the $11.6 billion it’s already behind schedule – the long-term consequences for American competitiveness could be serious.

Over time, companies would see fewer skilled job candidates, and academic and corporate researchers would produce fewer discoveries. Fewer high-tech startups would mean slower economic growth. America would become less competitive in the age of AI. This would turn one of the fears that led lawmakers to pass the CHIPS and Science Act into a reality.

Ultimately, it’s up to lawmakers to decide whether to fulfill their promise to invest more in the research that supports jobs across the economy and in American innovation, competitiveness and economic growth. So far, that promise is looking pretty fragile.

This is an updated version of an article originally published on Jan. 16, 2024.

Jason Owen-Smith receives research support from the National Science Foundation, the National Institutes of Health, the Alfred P. Sloan Foundation and Wellcome Leap.

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