The US post-pandemic corporate earnings boom is over

With the bulk of the quarterly reports, earnings per share of companies in the S&P 500 Index fell 2.3% in the last three months of 2022, the first decline since the third quarter of 2020, according to data compiled by Bloomberg Intelligence.

Also noteworthy: While most companies were still able to exceed analysts’ forecasts, the proportion of those who caused negative surprises rose to the highest level since the beginning of the corona pandemic. And profit margins are shrinking, squeezed by inflation and economic prospects that have eroded the ability to pass on costs through price increases.

The reports have underscored the wide disparity between flagging fundamentals and a stock market that has rallied this year largely on speculation that the Federal Reserve may be able to slow inflation without derailing the economy.

This focus on the future has led stock investors to largely ignore disappointing results from some of the market’s biggest companies — like Apple Inc. and Alphabet Inc. — while rushing into stocks that beat expectations, such as DuPont de Nemours Inc.

“The lagged effects of tighter monetary and fiscal policies are leading to a slowdown in revenue growth, but we’re also looking past that to some extent,” said Brad Neuman, Alger’s director of market strategy. “To be successful in short-term investing, you need to invest in companies that have underlying resilience in a challenging earnings environment.”

Here are some of the key things we learned from the fourth quarter results:

Tech earnings are missing

The biggest tech companies are feeling the effects of slowing demand and a weaker digital advertising market. Together, Meta Platforms Inc., Apple, Amazon.com Inc., Microsoft Corp. and Alphabet missed consensus earnings estimates by 8%, according to Bank of America Corp. strategist Savita Subramanian, who attributed it to recent economic shifts with the pandemic-era stimulus “solid behind us.”

Despite this, most major tech stocks have rallied amid rising expectations for a soft economic landing, optimism about China’s reopening and investor rotation back into stocks that were hardest hit last year.

Job cuts bolster equity bulls

While the job market has remained surprisingly resilient amid the Fed’s rate hikes, many companies are quickly moving to downsizing in anticipation of a deeper slowdown. Among them were Meta, Zoom Video Communications Inc. and Walt Disney Co., whose shares rose on cost cutting.

“That’s what investors have been asking for, and there’s no better example than Meta,” said Neuman von Alger. “Companies are listening to investors after hearing from investors for over a year that they need to stop spending and invest in companies that generate more profits in the short term.”

Not all of the job cuts were well received, however, as companies like News Corp., Dell Technologies Inc., and Match Group Inc. stumbled upon the news with underwhelming sales.

The economic slowdown is showing

The cleanup from the Fed’s steadfast efforts to tame inflation was evident in earnings. Apple, for example, reported its worst vacation results in years as consumers around the world slowed spending on things like mobile devices and computers.

Overall, revenue growth for S&P 500 companies slowed to 4.5% in the last three months of the year, less than half the pace of the previous three months and the slowest since late 2020, data compiled by BI shows. Company of Whirlpool Corp. until Tyson Foods Inc. said the impact of higher inflation and rising interest rates will impact expectations in the coming months, but that things will improve in the second half of the year.

Pressure on margins persists

Margins have remained under pressure across industries as companies are forced to grapple with tight labor supply and dwindling pricing power. According to Wells Fargo, adjusted operating margin at non-financials fell to 14.3%, its lowest quarterly margin in two years, from 14.9% in the third quarter.

Overall, operating margins beat expectations the least in more than a year, with a majority of S&P 500 companies falling short, BI data shows. Even with a spate of job cuts at big tech companies, weaker demand coupled with negative operating leverage suggests that BofA’s Subramanian says “more pressure on margins is ahead.”

Elsewhere in corporate earnings:

10 Feb Yield highlights

Asia:

Semiconductor Manufacturing International shares fell in both Hong Kong and Shanghai on Friday after the company forecast a successive decline in Q1 revenue

Toyota fell as the automaker’s quarterly results failed to overcome some analysts’ concerns about supply chain challenges.

EMEA:

Adidas plummeted after the sportswear giant warned the fallout from its row with rapper and former partner Ye could result in an operating loss of 700 million euros in 2023, a forecast analysts call “terrible” and fixing some will take time

L’Oreal fell, reversing initial gains as some analysts looked beyond the French cosmetics company’s Q4 sales decline and 25% dividend hike to highlight expensive share valuations and a decline in operating margins. The results follow a pessimistic outlook from rival Estée Lauder

America:

Lyft crashed after the ridesharing company issued a significantly weaker forecast than expected. Analysts have lowered their price targets for the stock and downgraded their recommendations, noting that the company’s efforts to compete with rival Uber by cutting prices will squeeze margins

news corp tumbled after the media company reported second-quarter adjusted earnings per share that missed the average analyst estimate and said it would cut 5% of its workforce this year, or about 1,250 jobs

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