Earnings season kicked off last week with 10 S&P 500 companies reporting and banks and financial companies dominating the total. The deceleration of consumer inflation (CPI) supported stocks, and large bank earnings were better than expected across the board. The S&P 500 rose by less than 1% for the week, but large bank shares soared by over 3%. The pace and the breadth of the fourth-quarter earnings season accelerate this week, with 60 S&P 500 companies scheduled to report. A more detailed preview of the earnings season is available here.
At this early juncture, blended earnings, which combine actual with estimates of companies yet to report, are slightly better than forecasts at the end of the quarter. The high earnings growth rate for consumer discretionary is a bit misleading since the hotels, restaurants, and leisure, along with the broadline retail industries, reported a loss in the first quarter of 2023. Both of these segments of consumer discretionary should post a profit this quarter. In addition, industrials is a mixed bag despite being expected to post the second highest year-over-year growth rate. The higher growth rate is being helped by the passenger airline segment forecast of a much smaller loss this quarter versus the first quarter of 2022.
While the sales growth may seem elevated for the quarter relative to the relatively steep decline in earnings, the high inflation rate boosts the result. Sales growth is closely tied to nominal GDP growth, combining after-inflation economic growth (real GDP) with inflation. With nominal GDP growth expected to remain in the high single digits year-over-year for the first quarter, the consensus estimate of 1.9% year-over-year sales growth for the S&P 500 looked achievable. So far, with a small number of companies reporting, sales have been running at 2% year-over-year. Despite sales being expected to shrink by -5%, the energy sector earnings growth should still grow at 10% year-over-year. Some investors remain positive on the sector as regulatory filings showed that Berkshire Hathaway
BRK.B
bought more Occidental Petroleum
OXY
(OXY) shares this year and owned more than 20% of the company. A previous piece discussed why Warren Buffett’s Berkshire Hathaway probably favors Occidental Petroleum.
So far, the blended earnings performance has slightly outperformed expectations at the end of the quarter. Combining actual results with consensus estimates for companies yet to report, the blended earnings growth rate for the quarter improved to -6.5% year-over-year, ahead of the expectation of -6.6% at the end of the quarter. Despite the improvement in first-quarter blended earnings, expected earnings growth for the calendar year 2023 declined.
Bank and financial earnings dominated the first week of the earnings season. Headline earnings from the banks were uniformly better than expected. JPMorgan (JPM), Wells Fargo
WFC
(WFC), PNC Financial (PNC), and Citigroup
C
(C) beat earnings estimates. More importantly, given the banking crisis, guidance was also uniformly better than expected. The large banks reporting so far, at a minimum, reiterated previous guidance despite the banking crisis and a more challenging economic environment in 2023. JPMorgan even boosted guidance, benefiting from the riskier and capital-constrained smaller banks. More banks and financials report this week, including Goldman Sachs (GS), Schwab (SCHW), Bank of America
BAC
(BAC), US Bancorp
USB
(USB), Discover Financial Services
DFS
(DFS), Comerica
CMA
(CMA), and several regional banks. The smaller banks’, including some of the regional banks’, earnings and outlooks are heavily anticipated because the data seems to indicate a divergence in operating performance between the large and smaller banks after the collapse of Silicon Valley Bank (SIVBQ). For more detail and the status of the banking crisis and the operating performance of banks, an analysis using high-frequency data is here. The stocks reflect that differential as the KBW Regional Bank index was almost -1.5% lower last week, while the large banks soared higher.
Outside of earnings season, stocks were supported by the continued moderation in the consumer inflation data. The March headline CPI reading declined to 5.0% year-over-year rate from 6.0% in February and well below the high of 9.1% in June. The better headline inflation reading had less attractive underlying details, with the sticky inflation components only declining to 6.6% year-over-year. The stubbornness of the sticky inflation component remains a risk to the timeliness of the headline returning to near the 2% target rate and the upside risk to the number of Federal Reserve hikes currently priced into the market. Consensus expects the last Fed rate hike of 25 basis points (0.25%) on May 3.
It is still very early, but headline earnings improved last week and are slightly above estimates at the end of the quarter. As discussed last week, the items weighing on earnings include slowing economic growth, rising costs, and a strong dollar. Still, actual results can outpace the dour estimates at the beginning of the earnings season. This week a more diverse group of companies beyond the banks reports earnings, so it will be instructive to see if the earnings performance continues its relative improvement. In addition, the smaller banks will be of particular interest. Early large bank results and other data indicate that large banks might benefit at the expense of small banking in the wake of the banking crisis. Given the contraction in earnings and the high probability of recession in 2023, markets are likely to be particularly sensitive to forward guidance from companies.
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