It’s an exciting time as corporations prepare to deliver their first earnings reports of the new year. Of course the upcoming reports for this earnings season are for the final quarter of 2022 but there is still much to learn from the results when making investment decisions for 2023.
Current Macroeconomic Landscape
It was a rough 2022 overall as markets dealt with sustained high inflation while the Federal Reserve looked to cool down price pressures with a series of aggressive rate hikes. It seems that finally prices are starting to get under control based on recent inflation data.
Thus, the central bank is easing its rate hikes but aren’t cooling down as fast as many investors expected and hoped for. San Francisco Fed President Mary Daly and Atlanta Fed President Raphael Bostic recently said they expect the Fed will push rates above 5% and hold them there for an extended period. The federal funds rate is currently being held between 4.25% and 4.5%.
So what’s all this interest rate talk have to do with corporate earnings? Well, higher interest rates put strain on the overall economy with some firms being more effective in remaining profitable during higher rate periods. Additionally, the leading cause of these rate bumps, higher prices and costs, will show which companies were able to minimize damage from supply chain disruptions and other macroeconomic factors.
Primarily, banks will likely give valuable information on how they performed this quarter and their strategies for dealing with higher rates. Luckily, they are set to kick off earnings season at the end of this week.
It's All About the Banks
JPMorgan (JPM), Bank of America (BAC), Wells Fargo (WFC), and Citigroup (C) are all set to report on Friday morning with Goldman Sachs (GS) and Morgan Stanley (MS) on the docket to release results on Tuesday before market open. Sadly all of those financial institutions are projected to report a drop in earnings-per-share compared to their performance from a year-ago. Morgan Stanley and Goldman Sachs are expected to see the largest drop in performance from that group.
Currently financial institutions are projected to see a 12% drop in earnings-per-share from last year with only energy companies expected to see a similar drop. Analysts have been cutting their forecasts going into earnings season overall as investors prepare for another batch of rough results to close out a difficult 2022. Additionally, analysts have cut their full-year 2023 forecasts by 4.4% which markets the largest drop in forecasts since 2014.
It doesn’t end there either with many banks projected to announce a wave of layoffs in cost cutting efforts. A measure that will be particularly interesting as those financial institutions provide insight into the current health of the labor market and updates regarding lending, deals and public offerings. So far analysts are not expecting a rosy picture but the real news will be whether that doom and gloom is exaggerated or understated.
Staying with the theme of 2022, retailers are already in the news yet again for cutting forecasts. Macy’s (M) and lululemon (LULU) both saw their share price fall Monday as the apparel retailers downwardly revised their guidance while Bed Bath & Beyond (BBBY) managed to yet again miss on earnings as the retailer is probably about one year away from having as many stores as Circuit City.
Retailers across the board struggled in 2022 with the likes of even Target (TGT) and Walmart (WMT) being unable to avoid some struggles. Large brick and mortar retailers should give an interesting update on changes in consumer discretionary spending as shoppers dealt with higher prices in 2022 and chose what little discretionary money they have to spend on traveling and other services instead of the goods already purchased during the pandemic.
Which leaves airlines as one of the more interesting industries this earnings season. Delta (DAL), American (AAL), United (UAL), JetBlue (JBLU), Alaskan (ALK), and Southwest Airlines (LUV) are all projected to report higher earnings-per-share this quarter from their year-ago quarter.
United ($2.14 vs $-1.60 EPS), American ($0.59 vs $-1.42), and Delta ($1.33 vs $0.22 EPS) are expected to report the largest rise in performance from last year as consumers came back to traveling as regulations were lifted and the pandemic became mostly a thing of the past. Airlines are still not where they were before the pandemic initially struck but have at least returned to profitability for the time being.
All in all, it's shaping up to be yet another interesting earnings season with hopefully some positive signs coming from various industries across the economy as markets look to bounce back from a tumultuous 2022.