Earnings season is upon us with JP Morgan kicking off the “official” start tomorrow before market open. We also have Wells Fargo, PNC, Citigroup, Blackrock and United Health reporting tomorrow.
While all eyes will be on the regional banks, the entire season promises to bring some fireworks. Estimates suggest that this will be the trough for earnings with a decline in growth of -7%.
Here’s a few things to look out for this earnings season:
Demand Destruction
We know the Fed is trying to destroy demand and I believe we will see companies miss on this front. Not necessarily miss estimates but, rather see a decline in revenues that leads to lower earnings.
Companies have been cutting costs in an attempt to improve their bottom line but, they can’t really do much to improve demand in the current environment. This is where companies are likely to take the hit, including Tech.
While inflation coming down is a good thing for the economy, it also means that companies that have not cut costs enough, will likely see margins compress and again… a decline in earnings.
“Adjusted” Earnings
While the past one year has seen companies take write downs on goodwill from poor acquisitions, I think we’re yet to see the full effect of this. I think we are likely to see more adjustments and write downs.
Worse still, will be the “write ups”. Companies are likely to adjust their earnings for expenses that will lead to higher adjusted EPS.
We’re increasingly seeing a divide between adjusted EPS and reported or GAAP EPS and this will be something to keep an eye on. It’s important to note what companies are adjusting out of their earnings.
Buyback Announcements
Last season, we saw a great number of companies announce buybacks and stocks rallied on that news. But, remember an announcement or authorization is not the same as actually doing the buybacks. Furthermore, most authorizations tend to span a few years.
In a time when companies will strive to conserve cash, it unlikely that we will see companies actually buy back their stock.
China Reopening
Issues with China’s lockdown was a major sticking point for the past couple of earnings seasons - both on the demand and the supply side. With China back to “normal”, this will be something to take note of.
The Banks
Finally, the banks. As I said this earnings season will be all about the banks. Here’s a cheat sheet to look at bank earnings:
I think the market is likely to focus on deposits, and unrealized losses of held-to-maturity securities. But, I will continue to focus on the bank’s credit provisions, and the quality of the loan book. I think we’re likely to see a rise in delinquencies and defaults and this will be something to keep an eye on.
As long as the yield curve remains inverted, and loan growth declines, banks will also see their profitability come under pressure.
Here are a few consensus estimates on an industry level from Goldman Sachs: