This week marks the official start to the first quarter earnings season and the results are likely to look bleak. The consensus, among analysts who predict this kind of thing, is that S&P 500 companies will see their earnings per share (EPS) fall an average of 7%, compared to a year ago – the biggest drop since 2020. They also expect this quarter to be the trough, meaning that things will only improve from here. But, as we know, Wall Street has a habit of being slow to react to cut numbers, and quick to predict a recovery – so it’s best to take that with a pinch of salt.
Instead, according to Goldman Sachs, you’ll want to pay attention to these four themes this earnings season:
Margin outlook: what companies are seeing now in terms of pricing pressures will be a forward-looking “leading” indicator of whether inflation is likely to stay higher for longer.
Slowing cash use: buybacks slowed up to 21% at the end of 2022, compared to the year earlier, and this suggests that companies may continue to be cautious in how they spend cash. And of course, any pullback in capital expenditures (capex) is likely to weigh on growth longer term.
Signs of a China reopening boost: economic data has been mixed, at least so far. So companies’ on-the-ground commentary about how things are going since the country dropped its Covid restrictions will give a clearer picture of which sectors are benefiting.
Artificial intelligence (AI) talk: the technology is in its early days, but it’ll be interesting to hear how companies plan to integrate AI into their operations, and how much of a margin boost they expect from doing so. In the near term, though, any AI spending could weigh on profitability.
You shouldn’t expect a lot of profit warnings this quarter: companies set their full-year targets only three months ago, after all. But, because of that, you can expect the market to take very badly any company that does profit warn. And with the S&P 500 up almost 7% this year, despite some big downward earnings revisions, risks are definitely skewed to the downside. Consider yourself warned.
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