Companies are becoming more confident in their earnings prospects for this year, although Wall Street still has a long way to go before there is a substantial long-term rally, most investment banks are currently suggesting. Fears are still lurking taking into account that there has been the fastest rise in interest rates in history since March 2022.
Still, the signs of optimism represent positive change. In the past year, analysts’ median forecast for 2023 earnings for S&P 500 companies has fallen just over 10%, according to FactSet. This is partly because Wall Street sees plenty of challenges, and partly because companies in general have lowered their forecasts. Something logical if one considers that inflation and the cost of interest are beginning to take their toll.
There are many reasons to worry. The Federal Reserve’s interest rate hikes, designed to cool inflation and reduce demand for goods and services, mean businesses will be able to raise prices less quickly and sell less than they offer. The cost of labor continues to rise, threatening the profit margins of companies listed on the US market.
But now fewer companies are lowering their earnings estimates. In the past three months, the percentage of companies listed on the benchmark US stock index that lowered their earnings forecasts was 25 percentage points higher than those that raised them, according to 22V Research. “This contrasts with the 35 points of the three months prior to the end of 2022,” argues the firm.
In line with that, analysts are cutting their earnings estimates for fewer companies. The percentage of companies for which Wall Street is raising its earnings forecasts has risen in the past month, though the declines still outnumber the rises.
The less negative earnings outlook is consistent with the stock market idea that economic growth and earnings will soon bottom out and then pick up again as the Federal Reserve (Fed) wraps up its rate hike campaign. interest rates. Expectations that this predicted have helped lift the S&P 500 nearly 14% from the October low of above 3,500 points.
The increase in the index
But now, the market is priced dearly even though risks abound. The S&P 500 is trading at just over 18 times expected aggregate earnings per share for its component companies next year, up from just over 15 times in early October.
These benefits are smaller relative to the cost of the index, making equity returns less attractive than government bonds, whose yield has skyrocketed to 5% on 12-month Treasury bills.
In this sense, the prospects for profits are uncertain. “It is possible that the forecasts for corporate results have almost bottomed out, but any further reduction would make shares look more expensive,” explains JP Morgan in a recent report addressed to its investors.
Yes it is possible that the Federal Reserve has not finished raising interest rates. The annual rate of inflation stood at slightly above 6% in January, far from the Federal Reserve’s 2% target. Any further rate hikes by the bank could put additional pressure on economic growth and earnings.
“The Fed having to tighten much more and causing a recession is the risk to earnings,” DeBusschere wrote. “And that is what worries us the most,” says the expert about the framework on which the scene of the United States economy can move in the coming months. Time will pass sentence.