Analysts have rapidly cut profit forecasts for corporate America, even as the breadth of negative revisions is easing.
Since reporting season began more than a month ago, estimates for S&P 500 earnings this year and next were slashed by 2% and 1%, respectively. That doesn’t sound like a lot but, according to Goldman’s David Kostin, it’s “about twice the magnitude of the average EPS cut during Q4 earnings seasons since 1995.”
As discussed here at some length last week, companies are adept at managing down expectations, an effort which finds expression in bottom-up consensus. That, in turn, means there’s a tendency for results to be “better-than-feared,” forestalling the perception (if not the reality) of earnings recessions.
Consider that, as Kostin noted, consensus cut estimates for Q4 earnings by 7% between the start of the quarter and the day reporting season kicked off. So, although earnings growth ended up being negative for the first time since the pandemic, the 1% YoY aggregate decline was actually in line with estimates.
Were it not for the energy sector, where profits grew 57%, earnings would’ve contracted 5% during 2022’s final quarter.
Although revenue growth generally beat, margin compression was evident. The YoY decline for Q4 was the second quarterly contraction in a row. Analysts now expect profitability to remain under pressure, or at least for another quarter or two.
Consensus expectations for revenue this year and next are steady, but net margins are seen contracting to 11.5% in 2023, down ~80bps from record highs seen in the second quarter of last year.
The figure on the right above is straightforward: The squeeze on profits is expected to come from margin compression.
“Margins continue to face headwinds from decelerating revenue growth as well as still-elevated wage and input cost pressures,” Goldman’s Kostin went on to say.
Still, he expects those pressures to ease a bit this year compared to 2022. The profit outlook should “improv[e] as the year progresses,” Goldman said, although their forecast for margin expansion in 2024 is a mere 8bps. Consensus, by contrast, expects margins to expand 64bps in 2024, completely recouping 2023’s expected squeeze, on the way to double-digit EPS growth.
For what it’s worth, consensus now sees YoY EPS declines of 6% and 5% in Q1 and Q2 of 2023. By Q3, corporate profits will be growing again, according to company analysts.
Note that bottom-up consensus expects double-digit profit growth in perpetuity beginning with Q4 2023 results and looking all the way out to 2025.
