To everything there is a season, and now is the time of income.
Investors have been focused on inflation and Fed policy for the past few weeks, but now the market is reacting to higher earnings (especially the gap) and smaller economic data.
What is happening: “We expect earnings to take center stage,” Bank of America strategists Savita Subramanian and Ohsung Kwon wrote in a note on Friday. They noted that over the past three quarters, the S&P 500’s reactions to earnings declines and misses have surged higher and now exceed the market’s one-day reaction to both CPI inflation and the Fed’s policy meeting decisions.
Companies that missed both sales and earnings per share in the latest quarter underperformed the S&P 500 by an average of six percentage points the next day, the biggest reaction to an earnings miss on record.
Disney shares fell 13.16% last November, their lowest level in more than two years, after they missed earnings estimates. Shares of Meta fell 24% after reporting a third-quarter revenue decline in October, the company’s second quarterly revenue decline. And Palantir shares closed up more than 11% in November after it narrowly missed estimates.
“We see this as a market narrative shift from the Fed and inflation to earnings; reactions to earnings increased, while reactions to inflation data. and FOMC meetings are getting smaller,” Subramanian and Kwon wrote.
So we can expect some serious volatility over the next few weeks as companies report their fourth quarter corporate earnings.
Bank of America’s predictive analytics team analyzed earnings records to calculate sentiment scores and found that corporate sentiment remained unchanged. a third quarter that is above its highs, indicating a decline in future earnings.
Likewise, companies mentions of better business conditions (specific use of the words “better” or “stronger” vs. “worse” or “weaker”) remained well below the historical average, and mentions of optimism fell to their lowest level since the first quarter. 2020
So far the swings have been on the downside. S&P 500 fourth-quarter earnings per share estimates have fallen about 7% since October. Preliminary earnings reports from some of the biggest financial institutions point to a bleak quarter.
Bad news is expected. The estimated decline in earnings for the S&P 500 in the fourth quarter of 2022 is -3.9%, according to an analysis by FactSet. If it is really real decline, which would mark the index’s first decline in earnings since the third quarter of 2020.
Over the past few weeks, earnings expectations for the first and second quarters of 2023 have shifted from year-over-year growth to year-over-year declines, according to FactSet.
The most recent. JPMorgan beat fourth-quarter earnings estimates, but also raised the allowance for expected loan defaults. The bank added $2.3 billion in loan loss provisions in the quarter, a 49 percent increase over the third quarter.
The move was prompted by “a modest deterioration in the firm’s macroeconomic outlook, which now reflects a mild downturn in the central case,” the report said. In a follow-up call, JPMorgan CFO Jeremy Barnum told reporters that the bank expects a recession to hit in the fourth quarter of 2023.
Bank of America ( BAC ) also beat earnings expectations, but CEO Brian Moynihan said Friday that the bank is bracing for rising unemployment and a recession in 2023. “Our baseline scenario calls for a mild recession,” he said. The bank added $1.1 billion in allowances for loan losses, a sharp change from the previous year, when the number was negative.
What’s next? Hold on to your hats. In the coming week, 26 S&P 500 companies are scheduled to report fourth quarter results.
Apple CEO Tim Cook responded to angry shareholders by recommending that the company cut his salary this year, reports my colleague Anna Cuban.
Cook was paid $99.4 million in total compensation last year. The vast majority of his 2022 compensation, about 75%, was tied to company stock, with half of that tied to stock price performance.
But shareholders voted down Cook’s pay package after Apple’s stock fell nearly 27% last year. The vote is not binding, but the board’s compensation committee said Cook himself demanded reduction.
“The compensation committee balanced shareholder feedback, Apple’s exceptional performance and Mr. Cook’s recommendation to adjust his compensation in light of the feedback received,” the company said in its annual proxy statement released Thursday.
But don’t cry for Tim Cook just yet. This year, the executive stock award target is $40 million. About $30 million of that, or three-quarters of that, is tied to stock price performance. The tech mogul, who has led Apple ( AAPL ) since 2011, has an estimated personal fortune of $1.7 billion, according to Forbes.
Bottom line: Apple’s share price, like other tech companies, fell last year as coronavirus lockdowns shut down some of its factories in China. Supply chain bottlenecks and fears that a global economic slowdown could dampen demand also dragged down its stocks.
Angry investors believe the person at the helm of the company should also see a pay cut.