The US consumer remains undefeated
It’s “dangerous to underestimate US consumers”, says Bank of America. Indeed!
US retail sales handily beat forecasts Wednesday, after the bank’s strategists highlighted “card data [that] shows a surprising surge in Jan[uary]” in a piece published before Wednesday’s blowout retail-sales report.
BofA says that it’s dangerous to underestimate US companies as well. But the outlook for large-cap profits is . . . unclear, to say the least.
The strategists argue that the decline in corporate profits (and profitability) hasn’t been as bad as feared. Earnings season is in its final weeks, and the S&P 500’s 4Q earnings per share has posted a roughly 1-per-cent year-over-year decline, according to the bank. FactSet’s measure of 4Q net income shows a decline of around 5 per cent from 4Q of 2021.
BofA also points out that “despite all of the vaunted risks” to profitability — rising wages and interest rates, paired with falling demand and pricing power — the net margins on non-financial companies in the S&P 500 are tracking just 20 basis points lower than forecast.
Now, the strategists didn’t publish what exactly 4Q margins are, or their forecasts. So we tried FactSet, which appears to only have annual margins, not quarterly. (If the data provider tracks quarterly margins, we don’t have permissions for that.) For the full year of 2022, FactSet reports that the S&P 500’s Ebit margin is on track for a relatively small decline, to 16.3 per cent from 16.9 per cent the prior year.
Of course, that’s on the back of annual increases in sales and EPS, so it seems reasonable to think that the S&P 500’s margins contracted a good bit more than that in the fourth quarter.
But maybe things are looking up for 2023?
Well, not really. This year alone, companies’ downbeat guidance has prompted sellside analysts to cut their 2023 earnings-growth forecasts by three percentage points, according to BofA. Part of this is probably the result of companies’ well-known practice of underpromising and overdelivering. But analysts’ estimates now call for just 1-per-cent growth for the whole year, the bank says, down from 10-per-cent growth in June. “Most of the cut is attributable to weaker margins,” the strategists add.
More from the bank:
The earnings downturn so far has been driven by margin compression and decelerating but still positive sales growth (4Q earnings -6% YoY on current constituents, 4Q sales +7% YoY). This is typical of the early stages of an earnings recession: sales slow faster than costs, resulting in the initial earnings decline. The next leg is most often driven by sales decelerating further which we think is likely in a soft or hard landing. Here, companies typically can’t cut costs fast enough, resulting in a more dramatic deterioration in earnings. The average earnings decline amid positive sales growth has been -8% YoY vs. -12% YoY when sales didn’t just slow but actually dropped.
Long-term trends in margins and operating leverage don’t look much better (please excuse the difficult-to-read text in the legend):
Maybe large-cap companies can pull other levers to support their share prices. Stock buybacks are always an option, right? There has been a near-record volume of corporate share repurchases this year, as BofA points out:
Corporates are buying back shares at a healthy clip in 2023: based on BofA Equity Client Flow Trends, buybacks as a percentage of S&P 500 market cap are tracking just below 2019 and 2022’s record stats (0.034% vs. 0.036%).
But there’s a catch:
But the high dollar amount (~$130B) is almost entirely (90%) made up of two companies, Chevron and Meta. New buyback announcements are low — half of what we typically see YTD based on data over the last decade, and higher rates pose a secular headwind to buybacks; we see a more compelling case for dividends and capex, both of which have meaningfully lagged buyback spend over the past decade of ultra-low rates). Tech headwinds could slow one of the biggest buyback sectors in recent years.
So, uh, good luck to all!
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