Big business is in for a rough earnings season

Hatop executives Eight of the world’s largest companies left Davos on January 20 after a week of beards on high spirits. The mood at the annual gabfest was at least brooding, if not hilarious. in a closed room, CEOIt acknowledged that while the war in Ukraine remains a humanitarian tragedy, the risks to the global economy need to be contained for now. If there is a recession in America and Europe, it should be manageable. The Chinese delegation sent the clearest signal in years that China is not only reopening from a tough “zero Covid” regime, but is also reintegrating with the world. Globalization may not be at its worst, but the news of its demise appeared exaggerated to our snowy bosses.

Back on Earth, things look more dangerous. “Earnings season will be a confessional event,” said Jim Tierney of investment firm AllianceBernstein, referring to the month most companies report quarterly earnings. Profits at a major American bank that started operations in the past week or so fell by 20% from a year earlier. Investment bankers were hit particularly hard as trading collapsed amid economic uncertainty. In early January, Goldman Sachs laid off about 3,200 employees.

Profit forecasts for large US companies have plummeted even more than the Black Ski Run. In his final three months of 2022, the analyst revised its earnings forecast for the fourth quarter. S.&P. The 500 Index fell 6.5%, double the typical downward revision. Wall Street’s consensus for the past quarter shows that earnings fell year-over-year for the first time since the severity of the 2020 pandemic (see Figure 1).

For many businesses, costs are rising faster than sales. Businesses are finding it harder to resist rising wages than to pass the rising costs on to their customers. This has compressed profit margins, which analysts have not yet fully digested, but expects earnings to increase in 2023. If the U.S. economy were to fall into recession, as many economists predict, profits would almost certainly fall further. Goldman Sachs calculates that earnings per share have fallen an average of 13% during recessions since World War II.

The first thing companies confess is consumer fatigue. On a corporate conference call with analysts late last year, many spoke of weak demand as shoppers cut back on discretionary spending. Procter & Gamble, which sells products ranging from diapers and detergents to dental floss, reported lower volumes across its businesses in the fourth quarter. He was able to meet earnings expectations simply because he raised the price by 10%. We are planning another price increase in February.

But the chorus of bosses touting “pricing power,” which was popular last year, will quiet down this earnings season. Households are still spending the surplus savings they racked up during the pandemic, but they are increasingly seeking bargains. Retail sales fell 1.1% on a seasonally adjusted basis compared to the previous month as American consumers bought up everything from restaurants to electronics in his December. Constellation Brands, which makes and sells Corona beer for drinkers in the United States, plans to slow down its price increases this year, he said on Jan. 5. Many retailers discount their products to clear out inventory. Tesla’s car prices are 20% lower than him globally.

Businesses are incurring excessive costs while demand is sluggish. This is his second confession. Tech companies that saw demand for their products slow from previous pandemic-induced highs last year are doing so with particular enthusiasm. Apple President Tim Cook will take a 40% pay cut this year. Twitter is auctioning off his neon bird wall art. Less symbolically, on January 18th, Microsoft announced plans to lay off 10,000 of her employees. Two days later, Google’s parent company, Alphabet, announced it was laying off 12,000 people. While these cuts won’t completely reverse the pandemic-induced mass hiring in the tech industry, Silicon Valley venture capitalists say more tech companies will cut salaries and provide an “air cover” to boost cash flow. We believe that we will provide

The company’s third confession concerns the fate of its profits. This earnings season is also a time for companies to plan their spending for the year ahead. Overall, large American companies tend to divide their spending evenly between payments to shareholders (through dividends and share buybacks) and investments (R&D, capital expenditures, mergers and acquisitions).

In the era of cheap currency, before central banks started raising interest rates to keep inflation in check, payments were often financed with debt. Now that money has become expensive, such borrowing is likely to subside. When it comes to dealmaking, many acquirers are still sorting out the turmoil created by deals being priced at top prices during the pandemic’s merger boom. A write-down admitting a fall in the value of some of these is more likely than an announcement of replenished war funds or a desire to make more trades.

It leaves an investment. The 21st century megatrends of decarbonization, digitization, and decoupling of China and the West favor massive spending on climate-friendly technologies, robots and software, and factories outside China. One European industry boss argues that as a result, capital spending should withstand an impending recession better than usual.

Maybe. However, most companies remain cautious for the time being. His one tracker of business spending plans compiled by Goldman Sachs after U.S. business spending increased in the third quarter of 2022 shows growth continuing, but at a much slower pace. .

Many businesses may postpone important spending decisions until economic uncertainty clears. Swedish telecommunications equipment maker Ericsson has warned that US customers are holding off on investing in new networks.Dell Cuts Shipments He Nearly 40% computerSales of s, which sells mainly to corporate customers, in the fourth quarter were IDC, a research company. Logitech, which makes keyboards, webcams and other desktop-related hardware, expects revenue to fall by as much as 15% for the fiscal year ending March, compared with earlier estimates of less than 8%. Manufacturers of software such as Microsoft and chips such as Intel may also be affected by pressure on digitalization budgets.

As with every earnings season, there will be positive surprises this year. Some buds have already sprouted. United Airlines didn’t put off vacationers and business travelers by raising prices. Netflix beat expectations with her 7.7 million new subscribers in the fourth quarter. This is partly thanks to newer, cheaper, ad-interrupting services. The struggling streaming service, which has lost about half of its market value since peaking in the fall of 2021, has released a bullish earnings forecast for 2023.CEOPerhaps because he believes the worst is over for the company he founded 25 years ago.

But such exuberance would be the exception rather than the rule this year. Overall, positive earnings forecasts for the next few quarters have weakened (see Chart 2).reached an all-time high as a percentage of GDP Last year, after-tax corporate earnings appeared to be slow to adjust. And they can go even lower. With interest rates rising and the appetite for deficit-funded tax cuts diminishing, the high debt and low tax rates that have boosted corporate profitability for decades are no longer the tailwinds they once were. . Real corporate life takes place on a more sparse level than in the Swiss Alps.

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