Earnings warnings have kicked into high gear, and there’s still no slowdown in sight
By Tomi Kilgore
S&P 500 companies continue to issue negative outlooks at a brisk pace, but analysts have cut their estimates much less than usual
Corporate America is warning of profit losses at a historically high rate and there are signs the pace may be picking up, but Wall Street analysts don’t seem to be listening too carefully yet.
The negative outlook for the current quarter, as inflation and ongoing supply chain challenges lead to slower demand, has clouded what has been a surprisingly clean first-quarter earnings season.
With virtually every company in the S&P 500 index reporting quarterly results, first-quarter earnings per share rose 9.1% from a year ago, well above consensus analyst expectations at the time. beginning of the quarter of 5.8% growth. Revenue grew even better at 13.6%, up from the initial forecast of a 9.7% increase.
Of companies reporting earnings, 77% exceeded consensus EPS estimates, according to FactSet, which is exactly the quarterly average for the past five years. But the magnitude of the earnings beatdown is 4.6% above consensus, just over half the five-year average of 8.9%.
Meanwhile, 73% of S&P 500 companies beat revenue expectations by 2.7% on average, better than the five-year averages of 69% of companies beating 1.7%.
While this data reflects a relatively healthy first quarter for businesses and their customers, second quarter forecasts provided by many companies suggest there has been a surprise drop in demand and profit margins since late March. while inflation and supply chain challenges have weighed on consumers, particularly low-income consumers, and on margins.
Snap Inc. (SNAP), despite not being part of the S&P 500, shocked investors last month by warning that it would miss the second-quarter guidance it provided a month earlier because “the macroeconomic environment s deteriorated more and faster than expected”.
Some other earnings highlights and disappointing guidance came from companies with first fiscal quarters ending in April, such as Target Corp. (TGT) and Walmart Inc. (WMT). Target actually cut its margin forecast twice in less than a month.
Discount home essentials retailer Big Lots Inc. (BIG) pointed to the effects of inflation on its customers, saying sales trends had “significantly slowed” in April.
“We believe the slowdown was caused by the spending pressure our consumers have been feeling due to higher gasoline prices and broader inflation, which is affecting discretionary spending across the sector. retail,” said General Manager Bruce Thorn.
However, it’s not all about inflation and the supply chain, as tech giants Microsoft Corp. MSFT and Salesforce Inc. CRM warned of the negative effects of a strengthening US dollar, fueled by rising interest rates and geopolitical concerns. .
There were 102 S&P 500 companies that released second-quarter EPS guidance, with 71, or 70%, of those companies providing estimates below consensus, well above the five-year average of 60. %, according to data provided by John Butters, senior earnings analyst for FactSet. This is the highest number of companies issuing negative forecasts since the fourth quarter of 2019, or before the pandemic.
What should worry investors is that while Wall Street analysts lowered their EPS estimates for the June quarter in response to the negative outlook, the cuts were well below historical averages. Additionally, analysts actually raised estimates for the second half of the year.
Analysts typically cut earnings estimates in the first two months of a quarter, but current-quarter EPS estimates fell just 1.2% despite all the earnings warnings, according to FactSet. This is only half of the average decrease of 2.4% over the past five years. This is still less than the average decline of 3.3% over 10 years and the average reduction of 4.7% over the past 15 years.
And the latest data from FactSet’s Butters shows EPS estimates actually rose 0.4% for the third quarter and 0.2% for the fourth quarter.
This is despite an indication that the pace of guidance reductions will not slow down any time soon, and may even accelerate.
Wells Fargo analyst Ike Boruchow said there was no doubt demand was slowing, especially among lower-income consumers. He noted that while revenue estimates have also fallen, they have not fallen enough.
“The negative review cycle has finally begun,” Boruchow wrote in a note to clients. “The fact is that demand is slowing (not accelerating) and inventory dynamics are also deteriorating, giving us concern that further cuts are on the horizon.”
An example of the inventory dynamics Boruchow refers to is what Target is experiencing. The company said lower-than-expected demand led to excess inventory and it plans several actions, including additional markdowns, to reduce the excess. This should lead to lower profit margins, which translates into lower profits.
Boruchow said history suggests the negative review cycle is only in the early innings.
“While it is certainly difficult to draw parallels with historic macro downturns, the key point we highlight is that the two previous recessions saw negative revision cycles lasting 12 and 15 months, with hollow peaks [revenue] -6% and -16% revisions,” Boruchow wrote. “So given that we’re only 1-2 months away (and only -1.4% on revenue estimates so far), it’s easy to see why the market is clearly bracing for future risk for the estimates.”
The S&P 500 has fallen 13.9% from the end of the first quarter through Friday, putting it on course for the worst quarterly performance since falling 20.0% in the first quarter of 2020 hit by the pandemic. And after falling 5.0% in the first quarter, the index is heading for the first consecutive quarterly declines since the second (down 0.2%) and third quarters (down 6.9%) of 2015.
(END) Dow Jones Newswire
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