U.S. Companies Face More Pain as Expected Earnings Recession Looms

NEW YORK—U.S. companies’ earnings woes are likely to extend beyond the weak fourth quarter, as a booming labor market weighing on margins looks set to hurt results in the first half of this year.

Expectations for U.S. earnings to decline in the first and second quarter come amid weaker-than-expected fourth-quarter results for 2022, which Credit Suisse estimates will be the worst earnings season outside of a recession in 24 years.

With fourth-quarter 2022 earnings estimated to have fallen from a year ago, a subsequent decline in the first quarter of 2023 would put the S&P 500 into a so-called earnings recession, a back-to-back decline in earnings that hasn’t occurred since COVID-19 blasted corporate results in 2020.

Fourth-quarter results are in already from 344 of the S&P 500 companies, and the quarter’s earnings are estimated at this point to have fallen 2.8 percent from the year-ago period, according to IBES data from Refinitiv.

Most strategists expect little improvement for the season, and analysts now forecast S&P 500 earnings falling 3.7 percent year-over-year in the first quarter of 2023 and 3.1 percent for the second quarter.

“What’s clear is the speed with which the 2023 numbers are falling is just worse than (usual),” said Jonathan Golub, chief U.S. equity strategist & head of quantitative research at Credit Suisse Securities in New York.

The darkening earnings picture bolsters the case for investors who believe the stock market’s early-year rally is unlikely to last, adding to worries over how high the Federal Reserve will need to take interest rates in its fight to keep inflation on an easing trajectory.

The S&P 500 notched its biggest percentage weekly decline since mid-December last week, though the index is up about 7 percent for the year to date.

“The reality for equities is that monetary policy remains in restrictive territory in the context of an earnings recession that has now begun in earnest,” wrote analysts at Morgan Stanley, including Michael Wilson, the bank’s U.S. equity strategist, in a Monday report.

Recent results and guidance from some of the most heavily weighted names in the tech-related space like Alphabet, Amazon.com, and Apple have been among the most memorable disappointments this earnings season.

Golub and other strategists say a tight labor market that is pressuring margins for companies as a key reason for the decline in earnings, and expect these costs to remain stickier than other pressures.

The recent blowout U.S. jobs report for January, which showed job growth accelerating and the lowest unemployment rate in 53 and a half years, has bolstered that view, while also stirring worries that strong job growth could lead to more rate increases from the Federal Reserve.

The central bank last year embarked on its most aggressive policy tightening since the 1980s in response to soaring inflation.

“If you look at revenues, they’re coming in fine,” Golub said. “So you say, well, then what’s the problem? Margins are collapsing from really high levels.”

By Caroline Valetkevitch

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