Tough earnings season kicks off with focus on 2023 forecast

“Consensus estimates were significantly lowered ahead of the start of the fourth quarter earnings season, which sets the bar lower for companies that want to beat it.“, writes Mathieu Rachet, analyst at Julius Baer. “That said, the investors will instead focus on forecasts for 2023.particularly how companies plan to deal with the expected squeeze on margins,” he adds.

“Companies are finding it increasingly difficult to protect their margins.”

Consensus forecasts for fourth-quarter S&P 500 earnings growth were revised sharply down from 16% to -4.7%, hurt by earnings cuts in all sectors except for the oil and gas. » Excluding the volatile oil and gas sector, Consensus calls for earnings to be 8.5% lower than in the fourth quarter of 2021.“, says Redeem.

At the sector level, it is expected that oil and gas, as well as the industrial sector, are expected to see the strongest profit growthunder the effect of the energy crisis, followed by the traditional defensive sectors. At the other end of the spectrum, cyclical sectors, such as materials and consumer goods, will show the weakest growth figures.

LOOKING AHEAD ESTIMATES FOR THE YEAR

Julius Baer insists investors focus on forecasts for 2023, especially on how companies plan to deal with the expected drop in margins.. In this regard, it is expected that the gap between earnings growth and sales growth is expected to continue to widen. (+8.5%), which indicates that the negative effects of operating leverage are intensifying, explains the Swiss bank.

“The consensus expects that S&P 500 profit margins down 0.8% to 11.2%.. Operating leverage has been a key driver of the higher margins and resulting earnings expansion seen since the start of the pandemic. However, it is a double-edged weaponIt works both ways, and has recently become negative,” warns Mathieu Rachet.

“With a rate of change in costs greater than the rate of change in revenues, it is increasingly difficult for companies to protect their margins.. In this context, it seems It is more important than ever to focus on companies with high operational efficiency, in terms of reducing costs and increasing free cash flow.“concludes Redeem.

CRAMER’S FIVE RULES

The famous American host Jim Cramer, who presents the program “Mad Money” on CNBC, offered investors the five rules of the game. five rules for the earnings season which is about to begin.

Cramer advises, first of all, not to succumb to an “instantaneous” analysis of the accounts. and, on the other hand, not to draw hasty conclusions from the comparison of these figures with the consensus forecasts. In addition, he also warns against you shouldn’t buy stocks on the basis of results alone.but that you need to research the company well beforehand, and you need to pay close attention to the performance of the company. to analyze very well the conferences given by the companies analysts to explain their figures. “The Q&A part is particularly important,” he says. He also recommends buying on the dips if, after detailed analysis of the results, it is believed that the market has misinterpreted the quarter.

Finally, Cramer refers to the willingness of the CEO of a company to buy back shares after the presentation of the company’s results. as a signal for investors to look for to buy.