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US Forecasters Get a Bad Case of the Gloomies

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2023-04-13

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America’s March quarter earnings season kicks off tonight and there’s a very negative trend emerging which should worry investors large and small.

The outlook for earnings is the gloomiest for 17 years, according to leading US financial data company, FactSet.

Some US analysts last week reckoned the S&P 500 companies could see a 5.2% slide in earnings, but it could end up a bit worse than that, judging by pressures on revenues and cash flows from the high pace of inflation and rising interest rates.

Other analysts reckon the slide could be 6.8% or a bit more.

The outcome will depend (again) heavily on the performance of energy companies. But Exxon Mobil has already warned of a possible 25% slide in March quarter earnings, thanks to lower prices for oil and gas and a bout of refinery maintenance that has restricted production and sales volumes in the US.

FactSet wrote that up to Friday (April 6) 106 S&P 500 companies (more than 20%) have issued earnings guidance for the March quarter.

And of that 106, 78 had issued negative guidance estimates, the highest level before the start of an earnings season in more than three years, according to the firm.

Just 28 companies have upgraded their guidance.

"The number of companies issuing negative EPS guidance is above the 5-year average of 57 and above the 10-year average of 65. The number of companies issuing positive EPS guidance is below the 5-year average of 39 and below the 10-year average of 33,” FactSet wrote.

"In fact, the first quarter has seen the highest number of S&P 500 companies issuing negative EPS guidance for a quarter since Q3 2019 (when 81 companies had issued downgrades).

"If 78 is the final number for the quarter, it will mark the fourth-highest number of companies in the S&P 500 issuing negative EPS guidance for a quarter since FactSet began tracking this metric in 2006.

On the other hand, the first quarter has also seen the lowest number of S&P 500 companies issuing positive EPS guidance for a quarter since Q2 2020 (24).

FactSet sees few chances of downgrades in the financial sector because of the banking crisis in March - not because of strong earnings but because these companies rarely issue guidance.

"Given concerns about bank liquidity, one might expect to see more companies in the Financials sector issuing EPS guidance for the first quarter. However, this sector historically has seen few companies provide quarterly EPS guidance.

"Over the past five years, just one company in the sector on average has issued quarterly EPS guidance. Over the past ten years, only three companies in the sector on average have issued quarterly EPS guidance.”

Three big banks - JPMorgan, Wells Fargo and Citi report on Friday, along with regional PNC and giant investor, BlackRock.

Tesla Inc, IBM and Johnson & Johnson are among the big companies reporting next week but the most influential will be Tuesday’s quarterly numbers from Netflix.

Earnings per share for the six biggest US banks (the above trio and Goldman Sachs, Bank of America and Morgan Stanley) are expected to be down about 10% from a year earlier according to US analyst estimates from tracked by Refinitiv, Reuters reported this week.

By the weekend the reports from the trio of banks could very well have set much of the tone for the rest of the reporting period.

Analysts expect weak results from investment banking operations, indifferent performances in the trading operations because of the uncertainty of the bank crisis in March. And analysts say they are looking for banks to set aside more capital to handle possible future bad debts and the much-tipped economic slowdown.

But the banking figure analysts will be looking at is deposit growth in the quarter as all three banks reporting Friday (and the three majors next week) should have benefited from a flight to quality by nervous depositors in smaller banks in the wake of the failures of Silicon Valley Bank and Signature Bank.

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