It appears that the first signs of recessionary pain will emerge from earnings

(Bloomberg) — Just as investors celebrate the prospect of a peak in inflation and the prospect of a soft landing, this earnings season is likely to show that there’s still a lot that should keep them up at night.

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As costs continue to rise, interest rates begin to fall and consumer spending declines, the results are expected to reveal the beginning of a recession in profits in the United States, which will continue until the second half of 2023, according to Bloomberg Intelligence strategists.

While analysts have been busy lowering their forecasts over the past few weeks, the consensus for corporate earnings in 2023 remains “extremely high” with or without a recession, according to Morgan Stanley’s Michael Wilson, who warned that stocks could drop about 25% in the coming months. The first quarter under pressure from weak earnings and guidance.

Madison Faller, global strategist at JPMorgan Private Bank, expects management to provide cautious comments given rising recession risks, normal inventories and wage pressures.

“With advanced economies slowing down, we think Street estimates will likely continue to decline, but not collapse immediately,” Waller said. “Margin deterioration is likely to continue into 2023 and will be the focus of management’s discussions with investors.”

With Wall Street banks including JPMorgan Chase & Co. and Citigroup Inc. and Bank of America Corp. to get going, here are five key areas market participants will see this earnings season:

Federal Reserve hub

While the signals from the earnings are important, investor interest is laser-focused on the Fed’s next moves. And with US and European interest rates expected to peak by summer, any comments about the impact of monetary policy are likely to come under close scrutiny. Investors will also be keen to see if companies are able to secure lower borrowing costs for the coming years and avoid the malaise of rising interest rates.

Against this backdrop, earnings estimates have fallen for most of last year. However, it is still too high, according to strategists such as David Kostin of Goldman Sachs Group Inc. , which expects more cuts because the risk of a recession, margin pressure and new corporate taxes outweigh upside risks such as reopening China.

“Increasingly the data is pointing towards a slowdown in activity across the board,” said James Athey, chief investment officer at Abrdn. Very few sectors now seem immune to a slowdown. Realistically, I think we’re still in the early stages of the impact of the Fed’s tightening.”

consumer expenses

Slowing demand will be in focus this reporting season as a harbinger of a recession. US economic data showed that consumers lost momentum in November amid rising interest rates and rising inflation. Americans are taking advantage of savings and relying more on credit cards, which raises the question of whether they will be able to continue driving economic growth through 2023.

Some companies have managed to weather these headwinds, at least for the time being. Nike’s quarterly sales beat Wall Street estimates amid higher holiday demand and FedEx Corp. earnings beat analysts’ estimates due to price increases and cost cuts. In Europe, Ryanair Holdings Plc, the region’s largest discount airline, raised its profit target for the full year after a stronger-than-expected Christmas travel period, while holiday sales rose at Tesco Plc and several other UK retailers.

Attempts were unsuccessful everywhere. Delivered by Tesla Inc. It sold fewer cars last quarter than expected despite offering huge incentives in its largest market, sending its shares into a tailspin. Macy’s Inc. expects It also reported weaker-than-previously forecast fourth-quarter sales, and sees consumer pressure continuing into 2023.

job cuts

Earnings reports will also be watched for more evidence of layoffs as companies react to the deteriorating backdrop. This phenomenon is most evident in the tech space, where companies are cutting jobs at a pace approaching the early days of the pandemic, as evidenced by recent announcements from Amazon.com Inc. and Salesforce Inc. . and Alphabet Inc. All are slowing or pausing hiring, while Taiwan Semiconductor Manufacturing Co. to weaker-than-expected sales by reducing spending.

Within the banking realm, Goldman Sachs, Morgan Stanley, Credit Suisse Group AG, and Barclays Plc have all either laid off employees or announced that they plan to do so in the coming months. McDonald’s is cutting corporate jobs, the first restaurant chain in the United States to do so despite a relatively strong sales performance in recent years.

“The importance of looking at earnings guidance, which is potentially more negative and which is currently reflected in consensus estimates,” said Marija Wittmann, chief strategist at State Street Global Markets, who stresses.

Energy prices

The impact of lower energy prices will be watched closely after WTI oil fell more than 35% from its March peak and gas fell in Europe amid milder weather – a big turnaround for commodities just six months ago. ExxonMobil, the largest US oil company, has already said lower crude oil and natural gas prices had a negative impact on fourth-quarter earnings.

US energy companies’ earnings for the fourth consecutive quarter are set to post at least double-digit growth, but they could post a year-over-year decline in earnings from the second quarter of 2023 to at least the first quarter of 2025, according to Bloomberg Intelligence.

“The slowdown in global demand for energy commodities will affect the energy sector,” said Joachim Clement, Head of Strategy, Accounting and Sustainability at Liberum Capital.

On the flip side, Clement noted that lower energy prices are “good news for sectors that have experienced margin pressures in 2021 and 2022. This is particularly evident in the valued consumer world.”

Reopening of China

Comments from companies with income and cost exposure to China will be scrutinized, after the world’s second-largest economy fully reopened on January 8. Mining, technology and luxury companies in the US and Europe derive significant sales from China, while cosmetics makers in Japan and tourism stocks across Southeast Asia should also get a boost.

However, with Chinese Covid cases rising and many countries imposing border restrictions on travelers from the country, the impact of reopening on global earnings may be limited in the current quarter.

Elsewhere in corporate earnings:

– With assistance from Ishika Mookerjee.

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