Investors Look to Corporate Reports With Low Expectations

The analysts who forecast the fortunes of corporate America have rarely been more pessimistic at the start of a year than they are in 2023.

The country’s largest companies are about to start publicly reporting their quarterly financial results, when analysts will pepper company management with questions about profits and losses and try to glean hints about what to expect in the months ahead. Coming after the S&P 500-stock index fell nearly 20 percent last year, these reports could help buoy the market if things aren’t as bad as they seem, or drag it down further.

On Friday, JPMorgan Chase, Bank of America, Citigroup and others will set the tone, providing a window on the state of the economy, consumer confidence and business activity in their financial releases.

Wall Street’s prognosticators predict that companies in the S&P 500 are about to reveal an aggregate fall in profit of about 4 percent in the fourth quarter of last year, versus the same period a year ago, according to FactSet, the first decline since the early days of the pandemic. They also expect earnings to continue falling in the first half before rebounding to finish up 4 percent for the full year, according to data collected by Goldman Sachs going back to 1986.

That may not sound so bad, yet it stands out as the lowest forecast in recent history. That’s worse than was expected at the beginning of 2009, shortly after the collapse of Lehman Brothers, and worse than at the start of 2002, as the dot-com bubble was rapidly deflating.

Inflation F.A.Q.

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What is inflation? Inflation is a loss of purchasing power over time, meaning your dollar will not go as far tomorrow as it did today. It is typically expressed as the annual change in prices for everyday goods and services such as food, furniture, apparel, transportation and toys.

What causes inflation? It can be the result of rising consumer demand. But inflation can also rise and fall based on developments that have little to do with economic conditions, such as limited oil production and supply chain problems.

Is inflation bad? It depends on the circumstances. Fast price increases spell trouble, but moderate price gains can lead to higher wages and job growth.

How does inflation affect the poor? Inflation can be especially hard to shoulder for poor households because they spend a bigger chunk of their budgets on necessities like food, housing and gas.

Can inflation affect the stock market? Rapid inflation typically spells trouble for stocks. Financial assets in general have historically fared badly during inflation booms, while tangible assets like houses have held their value better.

Analysts are balancing soaring inflation and interest rates against a resilient economy and some signs that inflation has peaked. They also tend to be a preternaturally optimistic bunch, so their not-so-great expectations are still cause for alarm for those who parse earnings forecasts, price targets and other ephemera produced by market watchers on Wall Street.

“It tells you expectations are already low,” said Ben Snider, an equity analyst at Goldman Sachs. “I don’t want to paint a picture that analysts are overly pessimistic. I think the estimates are reflecting what is a mediocre growth environment.”

For months, investors have been waiting for the bottom to fall out for corporate America. The rising costs of everything from energy to raw materials and labor stoked fears that profitability would plummet. However, many companies have been able to pass on higher costs to consumers without denting their sales, propping up profit margins and generating cash to spend on operations or dividends and share buybacks, which directly benefit investors.

That may be about to change.

Amazon is expected to report fourth-quarter earnings that are almost 50 percent less than the year before. Expectations for profits at Alphabet, Apple, Meta and Microsoft, which have an outsize impact on stock indexes because of their size, have also dropped, according to the FactSet. Big technology firms have laid off tens of thousands of workers in recent weeks.

However, all that information is immediately reflected in stock prices, or so the theory goes. That’s why investors and analysts pay such close attention to comments by corporate executives about how they see the future panning out, even if earnings calls are ostensibly held to talk about the past.

On these calls, analysts mix praise of management with pointed questions about the feasibility of their strategies. The discussion this quarter will probably focus on the effects of high inflation and interest rates, the likelihood of recession, and layoffs. Investors will also been listening for signals about the effect of China’s reopening as well as the impact of new taxes on corporate income.

And investors are wise to the common practice of executives talking down their companies’ prospects, giving themselves wiggle room for underperformance or simply a lower bar to beat and boost to their company’s stock price.

“Recent client conversations indicate some skeptical investors are wary that managements might low-ball” their latest results and the outlook for 2023, Goldman’s analysts wrote in a recent research note.

Understand Inflation and How It Affects You

  • Federal Reserve: Federal Reserve officials kicked off 2023 by grappling with a thorny question: How should central bankers understand inflation after 18 months of repeatedly misjudging it?
  • Social Security: The cost-of-living adjustment, which helps the benefit keep pace with inflation, is set for 8.7 percent in 2023. Here is what that means.
  • Tax Rates: The I.R.S. has made inflation adjustments for 2023, which could push many people into a lower tax bracket and reduce tax bills.
  • Your Paycheck: Inflation is taking a bigger and bigger bite out of your wallet. Now, it’s going to affect the size of your paycheck in 2023.

Yet there is also reason to be genuinely cautious.

Inflation remains stubbornly high, so the Federal Reserve is expected to keep raising interest rates, tightening the screws on the economy. Central bank officials have been adamant that the economy needs to soften in order to bring down inflation, and that implies more layoffs and weaker consumer demand, which makes it harder for companies to raise prices.

This week, the Walt Disney Company announced changes to its pricing policy at theme parks, an acknowledgment that it may have pushed too hard in pursuit of profit, while FedEx said it would further pare back some weekend delivery services as demand waned for its services.

“Big picture, we care about what is happening with demand and what is happening to companies’ costs,” said Ron Temple, the chief market strategist at Lazard.

Goldman’s analysts don’t expect earnings of companies in the S&P 500 to grow at all this year, a more downbeat forecast than the average. The bank itself laid off up to 3,200 people this week.

The biggest risk for companies and the stock market remains the Fed’s campaign to constrain the economy and lower inflation, potentially pushing the economy into recession. Goldman’s analysts see a potential earnings decline of more than 10 percent this year in that scenario.

“What worries me is that there is this sense that we may still come through this period with very little going wrong,” Mr. Temple said. “There is too much complacency.”

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