A number of big companies in the US are staring at a huge loss in profit since COVID-induced shutdowns. Estimates point towards the biggest fall in profits since the lockdown period.
The decline was precipitated by a combination of flagging consumer demand, tighter credit conditions, and a downswing in commodity prices, the Financial Times reported.
A growing number of companies signalled weakness in the first quarter, with 78 issuing negative guidance on their earnings per share—an indication that management expects to miss analysts’ forecasts—exceeding the five-year average by 37 per cent.
According to Jack Ablin, Chief Investment Officer at Cresset Capital, who was quoted by the newspaper, profit margins are coming under a fair amount of pressure.
“Companies were enjoying nominal growth; they had some pricing power, but their volumes were either shrinking or just staying the same, Ablin said.
The gloomy prediction by Wall Street analysts stands in contrast to a relatively buoyant market, with the S&P up more than 6 per cent since the start of the year.
Still, just 20 stocks have accounted for almost 90 per cent of that rise. Falling interest rate expectations have boosted the appeal of some of the biggest technology companies, a development that has masked a lacklustre performance from the wider stock market.
Analysts had higher expectations ahead of the quarter, forecasting a 0.3 per cent dip in profits on December 31. While earnings forecasts typically decline over a quarter, they did so more than as much as the average over the past five years during the opening three months of 2023. Only the utility sector finished the quarter with higher expectations than when it started.
The semiconductor industry, a part of the broader information technology sector, provided 11 such warnings. Of the 11 sectors in the S&P 500, materials is expected to take the worst earnings hit, with a 35.6 per cent decline forecast.
“Normally, you see material prices and profits swing in anticipation of a recession,” said Brad McMillan, Chief Investment Officer at Commonwealth Financial Network. “Companies are cutting back in anticipation of slower sales going forward.”
New orders for durable goods in the US fell for the second month in a row in February, while analysts had expected a rebound in buying.
As goods purchases slow, an uptick in services spending is expected to make the consumer discretionary sector the top performer in the quarter at 34 per cent earnings growth, driven by strength in hospitality-related industries. Profit growth in the airline industry is expected to make the industrials sector second best at 12.6 per cent.
Despite the recent turmoil in the US banking industry, the financials sector is expected to report a 2.4 per cent increase in profit and lead all sectors in revenue growth at 9.1 per cent, compared to the 1.8 per cent average. Citigroup, Wells Fargo and JPMorgan Chase will report first-quarter results on Friday before the market opens.
Goldman Sachs analysts wrote in a note to clients, “Since recent bank failures happened in the last few weeks of the quarter, the full impact won’t register in first quarter reports.”
Albin feels that the failure of three banks this year could put pressure on small and medium-sized businesses for the rest of 2023.
Unlike big companies which have “pretty much unfettered access” to capital, middle and small companies will likely feel the heat more, he said.