The Profit Recession Is Finally Here (But Don’t Tell Anyone)
You wouldn't necessarily know it from "Greedflation" banter and the perception that corporations are engaged in "profiteering" in the wake of overlapping crises, but corporate America is experiencing an earnings recession.
Scoff as you will, but every discussion can't be wide-ranging and nuanced. Sometimes, we have to focus on a set of commonly used definitions and measures, even when we know they don't tell "the whole story" or are otherwise imperfect. If not, it becomes quite difficult to tal
I’m a little surprised at the significant downturn in semiconductor earnings. Not a lot surprised because I am well aware that the crypto mining craze mixed with work from home definitely exploded demand. At this point, you can find extremely discounted computer equipment and components with ease. The reason I’m surprised is because of the CHIPS act, which I reasoned would increase demand through the on-shoring of semiconductor production that has been reliant on foreign providers. Wouldn’t the influx of government funding offset the reduction in demand for consumer products?
I feel we are still far from seeing any of that flow through to actual earnings – as with any CapEx, there is going to be a lag in ROI and in this case it will be a longer lag simply because firms need to build things from the bottom up. But that is my only narrowly educated guess.
CHIPs will not change which companies make semiconductors, just shift some of the manufacturing to US-sited fabs and assembly-test facilities. It will not accelerate semiconductor demand growth or reduce the cyclicality of the industry. Since those new fabs won’t come online for a year or more, the increase in semicap equipment revenue is still a ways off. Right now, CHIPs is mostly driving E&C (engineering and construction) revenue.
Good point, JL. We’re all getting excited about “the $50 billion” Chips Act. One hurdle is the restriction on any recipient of the aid doing business in China which will be difficult for some domestic and foreign companies.
But it is even more interesting to look at the actual numbers. That $50 billion sum sounds good, but only $23 billion of it is earmarked to support onshore fab construction. It’s still a lot, but it will be spent over ten (10) years, not all at once. Given the $20+ billion cost of building an advanced fab from the ground up, $2.3 billion per year appears to be woefully insufficient.
Part of the lack of benefit from the CHIPS act so far is that it will take 2-3 years at least to add whatever capacity is seen as economically viable. Suppliers must keep up with foundries as well. There will be a big lag here. Most of the output so far is a brief burst of political points.
Good table from GS.
Interesting to think about how it may look different by 3Q23. For example, bank EPS YOY is unlikely to be +11% in 3Q; I’m thinking a meaningfully negative percentage. Semi EPS YOY is likely to still be a negative percentage, but a little less so.
Also interesting to look at change in consensus 2023 earnings over the past 3 months. I pulled consensus net income for all S&P500 constituents as of now / 1 mo ago / 3 mo ago, summed for total S&P500 and by sector, and calculated the percentage change in the summed net income from 1 mo and 3 mo ago to now. This is a crude calculation, of course.
Category L1M%chg L3M%chg
S&P500 -0.6% -3.8%.
Bus Srvc +0.2% +1.0%
Cons Cyclical +0.1% -7.4%
Cons Non-Cycl +0.1% -2.4%
Cons Srvc -0.4% -0.8%
Energy -3.1% -9.2%
Finance -1.5% -3.0%
Healthcare -0.3% -4.2%
Industrials +0.3% -2.0%
Materials +0.9% -7.2%
Technology -0.3% -2.6%
Telecom -0.3% -4.8%
Utilities -0.1% -1.0%