Third Quarter Earnings and Prospects for 2023

The markets have bounced following a lousy September on the heels of corporate earnings, steady employment, and an October CPI that showed inflation may be cooling.  Both stocks and bonds have had big daily swings as money flows react to each piece of economic data. 

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Third Quarter Earnings and Prospects for 2023

Third Quarter 2022 Earnings

First, let’s look at the 3rd quarter earnings. 

According to FactSet, with 91% of S&P500 firms reporting, earnings grew 2.2%.  Profit growth has certainly slowed.  Based on the numbers, 69% of companies reported earnings that beat expectations, and 71% had revenues that surprised to the upside.  This earnings season did better than many feared.  Earnings reports are “rear-view” sets of data. Many companies issued guidance for this quarter’s numbers.

Of those S&P500 companies that announced guidance, 52 issued a negative outlook while only 25 think this quarter will be better than previously forecasted.  This seems to be saying that, while the 3rd quarter held up, the 4th quarter will be impacted by inflation and the general economic slowdown. 

Forecasting 2022 S&P 500 Profits

FactSet is forecasting 2022 S&P 500 profits at $221. With the S&P 500 index at $3,993, the price-to-earnings ratio (P/E) is just over 18. 

Next year, the forecast is for $232.51 in profits, putting the 2023 P/E at 17.2. 

The 5 and 10-year averages for forward P/E are 18.5 and 17.1, respectively. 

On a historical basis, the stock market doesn’t seem expensive but it is not cheap either.  The P/E has come down from about 23 at the end of 2020.

A Moderation in Price Increases

The latest CPI report showed a moderation in price increases.

Inflation is the key to getting market factors to improve. If inflation continues to moderate, the Fed can ease up on rate increases, removing the fear that the Fed will raise rates to the point where the economy will be pushed into a deep recession. If rates can ease or stay flat, and the economic prospects improve, P/E ratios can hold steady or possibly expand. 

The market will need to see a few months of declining inflation before the current rally can be sustained. 

Having said that, markets tend to move ahead of news so if we really have turned the corner on inflation and recession, stock and bond prices will let us know.

REITs: 10%+ Profit Growth

Continuing our look at company profits, FactSet indicated that real estate (REITs) saw plus-10% profit growth.  That’s a solid performance. Hotel and industrial REITs led as the trends for more travel and high demand for warehouses to support faster product delivery provided strong tailwinds.

Despite the earnings, stock prices for REITs have been hurt by rising rates and fears of recession.  The dividend yields are historically high for many REITs.  Some REITs in the hotel space have not yet increased their dividends to pre-COVID levels. 

If we can avert a hard-landing and interest rate pressures ease, these are opportunities for current and future returns. 

COVID Policy in China

In addition to inflation and rates, investors will be paying close attention to the COVID policy in China. 

This week, after a disappointing 2% growth in China’s GDP, there was some indication that restrictions will be lessened.  If China can open up and restore some higher level of growth, the metals and materials sectors should benefit. Stock prices for these highly economically sensitive companies have been hurt by global recession fears. 

How the Market Perceives Change

Securities prices move on change.  Whether this is a change in sentiment, a change in earnings forecasts, or a change in rates, investments react.  The change doesn’t have to be from bad to good to move prices. If the situation just goes from bad to less bad, it will be viewed by investors as positive. 

A mistake a lot of investors make is that they feel they need to wait until times are good or until some resolution happens in order to put money to work. Actually, by the time there is a resolution, prices already have moved. 

Crypto Musings

The last musing I’ll mention relates to crypto. 

This week we saw the demise of FTX. I’m still not sure what FTX was – a crypto exchange, a non-regulated crypto bank, a trading house, or all or none of the above. 

Billions have been lost in crypto through fraud, hacks, and the poor trading of its followers.  If the bloom does come off the crypto rose, will traditional “stores of value” and more speculative investments that arguably lost investors to crypto see a return of interest?  Gold miners, biotech, and micro-caps could see positive money flows. 

Putting Markets and Earnings into Perspective!

Markets aren’t everything. The season for thankfulness, peace and gatherings with friends and family is upon us.  I wish everyone health and happiness.

Don’t hesitate to reach out with questions.

Thanks for reading.

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Note: This blog article is intended for general informational purposes only. Nothing in it should be construed as, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy or hold, an interest in any security or investment product. Investing involves risk.

Image credit: Thanksgiving Day – The Dance by Winslow Homer, American (Boston, MA 1836 – 1910 Prouts Neck, ME), Published by Harper and Brothers Publishers, Harper’s Weekly, November 27, 1858, Harvard Art Museum