US stocks had a better start to 2023 than anticipated, beating expectations of a downtown.
Below - an analysis of the fourth quarter, and what's next for US stocks.
Analysing Q4 Earnings
Post-pandemic pent-up demand might be at an end (and with it, the boosted operating leverage and margin expansions). But as a result, companies focused on improving efficiency - and consequently, their fundamentals - in Q4 2022.
One word that slipped into almost every earnings call in the season was “inflation.” Some leading companies were able to raise prices to offset the impact of inflation on their bottom line. However, most companies, across sectors, were forced on trimming costs to defend their margins. Curtailing costs was the main driver of the fourth-quarter earnings beats, which bodes well for an improvement in corporate fundamentals ahead.
Rising inflation meant that companies that beat earnings expectations in Q4 tended to be those that had successfully cut costs. Some were able to preserve margins by raising prices, but these were in a minority.
Although 70% of S&P 500 companies reported earnings beats, the magnitude of the earnings upside, averaging 1.6%, was the lowest in 15 years. Also, the earnings beats were up against low expectations. Looking at profit growth of S&P 500 companies, there was a cumulative decline of almost 5% in the fourth quarter. This also marked the sixth consecutive quarter of margin contraction.
Those brands that were able to boost prices significantly were the biggest winners. Walmart posted revenues of $164.0 billion and earnings of $1.71 per share, with both figures handsomely beating market expectations. Target’s revenue grew 1.3% to $31.4 billion. But even in these instances, the price increases led to a decline in sales volumes. Coca Cola raised prices by 12% in the fourth quarter and saw a 1% hit to volumes, while Procter & Gamble took prices up 10%, and its volumes contracted by 6%. With that said, sentiment for Walmart and Procter & Gamble remains bullish, as can be seen on Acuity’s AssetIQ widget.
The strongest growth was seen in the energy, industrials, and consumer discretionary sectors, while tech giants lagged.
Meta Platforms reported a 52% year-over-year decline in earnings, while Amazon’s net income contracted to $300 million, from $14.3 billion in the same quarter in 2021. Apple reported a 5% decline in sales and Google-parent Alphabet’s revenues came in at $76 billion, almost one-third of the figure reported in the year-ago quarter.
Predictions for the upcoming earnings season
Bank stocks will be the key to the Q1 earnings season, in the wake of the collapse of Silicon Valley Bank and others.
The fourth quarter results were positive for Wall Street banks. JPMorgan Chase reported over $46 billion in pre-tax earnings, the second highest in the banking sector in more than a decade, while rescuing First Republic in March, contributing to the $30 billion of deposits used to avoid a liquidity crisis among struggling banks. Investors will be focused on deposits and unrealised losses when JPMorgan Chase, Citigroup and Wells Fargo, report results on April 14.
They'll be followed by Bank of America and Goldman Sachs on April 18. BoA beat expectations in Q4, while Goldman saw its worst earnings miss in a decade. Both have had estimates cut, and in Q1 both could deliver positive results.
When oil prices declined in March, ExxonMobile and Chevron received estimate cuts. But oil prices have bounced back - meaning we could see these brands and other energy majors significantly beating expectations.
Even with a positive tailwind from a strong Q4, 77% S&P 500 companies issued negative earnings guidance for Q1 2023. Meanwhile, Wall Street analysts have slashed their earnings estimates for the first quarter and the full year more than their average of the last two decades.
Are they being overly conservative? High inflation and major interest rate hikes are out of the way - inflation has slowed significantly in the past eight months, and the Fed is expected to cut rate hikes as a result.
The big winners in Q1 could be airlines, hotels and consumer staples, as consumer demand has been resilient in the US. But the real test will be in how well companies are managing costs in order to relieve the pressure on margins.
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