Fed analysts everything that matters and ignored outlook
Earnings prospects for companies in the S&P 500 Index are deteriorating rapidly – yet analysts can’t raise their price targets fast enough.
Think of it as the stock market split of 2023.
The two seemingly irreconcilable trends reflect how much stock prices are being driven by speculation that the Federal Reserve is nearing the end of its most aggressive cycle of rate hikes in decades. That bodes particularly well for valuations of growth and technology stocks, which held up this week’s big gains even after disappointing earnings reports from Apple Inc., Alphabet Inc. and Amazon.com Inc.
But the extent to which analysts are raising share price targets while trimming earnings estimates is puzzling to those used to the market depending on the underlying strength of American companies.
“Interest rates have gone down and your discount rate has gone down, so you could set a higher price even though your earnings aren’t going up [on the stock] just because of the lower discount rate,” said Crit Thomas, global market strategist at Touchstone Investments. “They say, ‘Hey, we’re going to be out of here in six to 12 months, so let’s just go through that.’
The fourth quarter earnings season did little to support optimism about fundamentals. Earnings in sectors from energy to consumer discretionary are below pre-season estimates and companies are downgrading guidance on expectations that growth will slow. In fact, Bloomberg Intelligence’s model shows that such a first-quarter earnings forecast has been cut the most since at least 2010.
That’s forcing analysts stuck with rosier estimates to follow suit. Of all the changes analysts made to their earnings forecasts over the past month, only 37% were upgrades, data compiled by Citigroup Inc. shows. The level has been associated with the last three economic recessions and is 30% below a historical average.
“For us, 2023 analyst numbers looked too aggressive,” Drew Pettit, Citigroup’s director of ETF analysis and strategy, said in an email. They are “quickly revised downwards to better reflect economic reality”.
Considerable uncertainty remains over the direction of the economy, particularly given Friday’s rapid job growth numbers suggesting it is still expanding at a solid pace. Overall, however, economists generally expect growth to slow or even contract as a result of tighter financing conditions.
“We’re starting to see some of these companies come out and make less-than-ideal growth projections,” said Brian Jankowski, senior investment analyst at Fort Pitt Capital Group. “We’re starting to see that these business projections for growth are more consistent with GDP, which is projected to be very little to flat.”
This was largely brushed aside in the stock market by speculation that interest rates are nearing their cycle peaks, a view bolstered by the Fed’s decision on Wednesday to slow the pace of its move. Sell-side analysts who cover the S&P 500 companies — and are already bullish — have responded by raising their stock price estimates as quickly as they can since spring 2021.
The Fed’s central role in the outlook for stock prices was underscored by the market’s strong performance this week amid some negative earnings surprises from large companies.
Apple reported a steeper holiday-season sales decline than Wall Street had anticipated, while Ford Motor Co. posted a profit slump amid an ongoing supply shortage. Results from Google’s parent company Alphabet signaled lower demand for its search advertising amid a slowing economy.
But on Friday, major stock indices remained little changed for most of the day before closing lower. Despite this, the S&P 500 posted its second straight weekly gain.
Elsewhere in corporate earnings:
Asia:
HDFC shares rose after the Indian lender posted 18% growth in individual loans in the third quarter as lenders in India continue to benefit from rising loan demand. The company reported net income for the three months ended December that was in line with the median analyst estimate
Naver jumped after its e-commerce and content revenue beat estimates, though fourth-quarter earnings missed consensus
EMEA:
Shares of Intesa Sanpaolo fell even after the Italian lender reported fourth-quarter net income that beat the average analyst estimate. The bank’s outlook wasn’t clear enough to “excite the market,” according to KBW.
Sanofi fell after the French pharmaceutical giant released fourth-quarter results that missed estimates, which analysts blamed mostly on weak sales from the vaccines unit. The 2023 EPS growth forecast could also disappoint and suggests a downside to consensus estimates, Jefferies said
America:
Apple stock reversed course and rose as analysts noted that the company’s services business remains an area of strength. Shares fell after the iPhone maker reported first-quarter sales that fell short of expectations, hurt by macroeconomic headwinds and supply concerns
Ford shares fell after the automaker’s fourth-quarter earnings missed estimates. Reaction among analysts was mostly negative, with some attributing the failure to company-specific issues. Meanwhile, Deutsche Bank lowers its recommendation to sell the stock as it sees “significant operating deficits.”
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