Post-pandemic corporate profit boom in U.S. is over

With many 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 noted: While most companies still managed to beat analysts’ forecasts, the share of negative surprises rose to the highest level since the start of the coronavirus pandemic. And profit margins are shrinking, weighed down by inflation and an economic outlook that undermines the ability to pay costs by raising prices.

The report underscored the wide disconnect between weakening fundamentals and the stock market, which has soared this year amid speculation that the Federal Reserve can reduce inflation without damaging the economy.

That focus on what’s ahead leads stock investors to largely ignore the disappointing results of some of the market’s biggest companies – such as Apple Inc. and Alphabet Inc. – while piling into stocks that topped expectations like DuPont de Nemours Inc.

“The lagged impact of tight monetary policy and fiscal policy driving sales growth slowed, but we are also looking through it to some extent,” said Brad Neuman, director of market strategy in Alger. “To be successful in short-term investing, you need to invest in companies that will have fundamental resilience in a tough earnings environment.”

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

Miss Tech Earnings

The biggest tech companies are feeling the effects of slowing demand and a weaker digital advertising market. Collectively, Meta Platforms Inc., Apple, Amazon.com Inc., Microsoft Corp., and Alphabet missed consensus earnings estimates by 8%, according to Bank of America Corp. strategists. Savita Subramanian, who said the current economic changes are the last. pandemic-era stimulus is “firmly behind us.”

Even so, most of the big tech stocks have rallied amid rising expectations for a soft economic landing, optimism about China’s reopening, and the rotation of investors back to stocks that struggled last year.

Job Cuts Bolster Stock Bulls

While the labor market remains very strong in the face of Fed rate hikes, many companies are rushing to cut their workforces in anticipation of a deeper slowdown. Among them are Meta, Zoom Video Communications Inc. and Walt Disney Co., which has seen its stocks gain by cutting costs.

“This is what investors want and there is no better example than Meta,” said Neuman Alger. “The company listens to investors after more than a year of investors saying that they should stop spending and prefer to invest in companies that are profitable closer.”

However, not all job cuts were well received as companies including News Corp., Dell Technologies Inc., and Match Group Inc.

Emerging Economic Slowdown

The shakeout from the Fed’s steady efforts to tackle inflation is emerging among earnings. Apple, for example, reported its worst holiday results in years as consumers around the world cut back on spending on things like mobile devices and computers.

Overall, sales growth for S&P 500 companies fell to 4.5% in the last three months of the year, less than half of the previous three months and the slowest since the end of 2020, data compiled by BI showed. The company from Whirlpool Corp. until Tyson Foods Inc. said that the fallout from higher inflation and higher interest rates will affect expectations in the coming months, adding to the half-year.

Margin Pressure Lingers

Margins remain under pressure across industries with companies forced to contend with tight labor supply and reduced pricing power. Among non-financial companies, adjusted operating margin fell to 14.3%, the lowest quarterly margin in two years, down from 14.9% in the third quarter, according to Wells Fargo.

Overall, operating margins exceeded expectations by the least in more than a year with the majority of S&P 500 companies falling short, BI data showed. Even with many job cuts in big tech, weaker demand paired with negative operating leverage suggests “more margin pressure ahead,” according to BofA’s Subramanian.

Elsewhere in Corporate Income:

February 10 Earnings-Related Highlights

Asian:

Shares of Semiconductor Manufacturing International fell in Hong Kong and Shanghai on Friday, after the company predicted consecutive declines in 1Q revenue.

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

EMEA:

Adidas fell after the sports group warned that the fallout from the dispute with the rapper and former partner Ye could lead to an operating loss of €700 million in 2023, a guidance that analysts said was “horrendous” and would take time to fix.

L’Oreal fell, reversing early gains, as some analysts appeared to pass over the French beauty company’s 4Q sales and 25% dividend hike to highlight its expensive share price and operating profit. The results followed a pessimistic outlook from rival Estée Lauder

American:

Lyft fell after the ride-sharing company gave a weaker-than-expected forecast. Analysts cut their price target on the stock and cut their recommendation, noting that the company’s efforts to compete with rival Uber by cutting prices will reduce margins.

News Corp fell after the media company reported earnings per share for the second quarter that missed the average analyst estimate, and said it would cut 5% of its staff this year, or about 1,250 positions.

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