Reporting season is upon us in the US and according to consensus, Q2 was the likely trough for an earnings recession that may already be over.
Aggregate index profits for corporate America probably fell 9% from the same period a year ago, analysts collectively reckon.
It’d mark the third straight quarter during which earnings fell on a YoY basis. The bar is high for energy companies (2022 was a banner year), where profits might’ve halved in Q2. Excluding energy, S&P profits likely fell 3%. The median stock is expected to post a 1% gain in EPS.
As the figure shows, consensus sees a quick inflection back to YoY growth.
Wall Street’s bears, and particularly Morgan Stanley’s Mike Wilson, worry the worst of the profit contraction may still be ahead given the read-through of slower inflation for top-line growth and lingering cost pressures.
On that front, sales growth is expected to be flat for Q2. It’d mark the first quarter in 10 during which revenues didn’t grow. The US economy is performing well (or anyway much better than analysts imagined), but as Goldman’s David Kostin wrote, “weaker commodity prices and falling inflation… may limit firms’ pricing power” and are “incremental headwinds to sales.”
That’s the bad side of disinflation. It’s a familiar tale: Input costs, and particularly wages and compensation, are still elevated, but firms’ capacity to pass those costs to consumers may be limited going forward, especially if the labor market slows and pandemic savings buffers dry up in Q4.
Relatedly, margins likely contracted for a fourth consecutive quarter, even as they’re seen expanding from Q1. The trough for margins was probably Q4.
“Unlike the past five quarters, forward earnings revisions appear to have bottomed,” Kostin remarked, in a late Friday note. Bottom-up estimates for this year and next have “stabilized” and forward revision sentiment is back to neutral.
“Earnings revision sentiment tends to move with S&P 500 returns,” Kostin reminded investors.
If you ask Kostin, America’s largest companies “should be able to meet or exceed the low bar set for Q2” which, again, “would mark the trough in EPS growth” assuming consensus is correct. He noted that ex-energy EPS troughed in Q4 2022, “coinciding with the market bottom.”
80% of S&P 500 market cap will report by August 7.
In regard to market truths, as you have famously noted, Walt, what we actually know about markets cannot help but be a largely subjective matter. It’s all about looking backwards in time, studying the history and behavior of the market, judging the possibilities of any investments, and placing bets. To me, it’s not much more sophisticated than answering relevant questions while betting on horses, such as:
Who were the equine and human studs and mares that begot the beast?
Who owns the horse?
What’s his diet?
What’s his training regimen?
Who’s riding him?
What’s his medical and injury history?
I make this comparison because a waiter acquaintance in a local French restaurant here in Chicago invests in horses. And his modest investments in horses have paid off quite well for him recently. His horse last year won the Kentucky Derby, providing an excellent return. Another horse he invested in won the Preakness this year.
Interestingly, today I saw a very flattering photograph of a well-suited Jack Ma in a Bloomberg article that described the latest news from China about curbs and pressures against Chinese tech giants being eased by Xi Jinping.
Yay! How about that! The CCP is finally reacting to consequences of its stringent, top-down management policies in China’s economy. Little do they know that it’s too late. The western monies feeding the Chinese economic horse are already fleeing the barn. Xi is being compelled. He’s not a man who actually gives a damn about western investment. I reckon he just looked in the mirror and saw something ugly and scary.
Xi unwittingly screws his own country. His arrogance and fond dreams of western economies abiding with him and kissing his ass when he bends over are history. I have sold any shares I had in dynamic Chinese tech companies and will not be investing in China at any time in the next few years.
As for US stocks, I hope the low cost-basis of my portfolio, which is concentrated on a few promising small-caps, will enable significant returns later in this cycle when we see the Q1 and Q2 returns next year. I have just five US stocks in the 5G, battery manufacturing, consumer services, and web advertising sectors that, despite their significant potential, are beaten down in the current US market downcycle. I have two advert companies that can reasonably be expected to lead my portfolio out of today’s uncertain economic conditions (I do not yet call it a recession).
It’s all just a bet, and there are always unpredictable outcomes. Hopefully, the CCP won’t invade Taiwan, and over time things will be clarified in the outstanding Russian matter. But such is the nature of investing and life itself. There are no guarantees. The risk of Xi Jinping loosing the Chinese hordes on Taiwan is a fact. So is the risk of Russia nuking Ukraine. These are extremely touchy matters.
We must think, execute analyses, consider outcomes, and make the most intelligent decisions we can. While the market is not actually like a horse race, it is a gamble. You must assure yourself in whatever way you can that the outcome you hope for is likely and reasonable. You’re sticking your neck out in a vulnerable manner. Like it or not, you’re betting on the future, rolling the dice and saying, “Yikes!”