Forget inflation, it’s all about earnings

New York

Everything has a season and now is the time to profit.

Over the past few weeks, investors have focused squarely on inflation and Fed policy, but now the market is reacting more to earnings (especially misses) and less to economic data.

what’s happening: “Going forward, we expect earnings to be central,” Bank of America strategists Savita Subramanian and Orson Kwon said in a report on Friday. ‘s reaction surged, outpacing the one-day market reaction to CPI inflation and the Fed’s policy meeting decisions.

Companies that missed both revenue and earnings per share last quarter underperformed the S&P 500 by an average of nearly 6% the next day.

Disney’s stock price fell 13.16% last November to its lowest level in more than two years. Meta’s stock plunged 24% after his third-quarter earnings fell in October. Also, Palantir’s stock fell more than 11% in November after falling slightly below expectations.

“We see this as a shift in the market narrative from the Fed and inflation to earnings. FOMC meetings are getting smaller,” write Subramanian and Kwon.

Therefore, expect serious volatility over the next few weeks as companies report fourth-quarter corporate earnings.

Bank of America’s predictive analytics team analyzed earnings records to calculate sentiment scores and found that company sentiment was The third quarter was well below its all-time high, indicating a potential decline in earnings going forward.

Similarly, corporate References to better business conditions (specific usage of the words ‘better’ or ‘stronger’ vs. ‘worse’ or ‘weaker’) are well below historical averages Mentions fell to their lowest level since the first quarter. 2020.

So far, the swing has been downward. His fourth-quarter earnings-per-share forecast for the S&P 500 is down about 7% from October. Early earnings reports by several large financial institutions point to a tough quarter.

Bad news ahead: The estimated earnings decline for the S&P 500 in Q4 2022 is -3.9%, according to FactSet analysis.if it’s true It marks the first decline in earnings the index has reported since Q3 2020.

In the past few weeks, as reported by FactSet, earnings forecasts for the first and second quarters of 2023 turned from year-over-year growth to year-over-year declines.

up to date: JP Morgan beat expectations in its fourth quarter earnings, but the amount of expected loan defaults also increased. The bank added $2.3 billion to its loan loss reserves in the fourth quarter, up 49% from the third quarter.

The move “followed a slight deterioration in the company’s macroeconomic outlook, which currently reflects a mild recession in the central case,” the report said. In a subsequent call, his CFO of JP Morgan, Jeremy Burnham, told reporters the bank: expects recession by the fourth quarter of 2023.

Bank of America (BAC) also outperformed profits But Chief Executive Brian Moynihan said Friday that the bank is bracing for rising unemployment and a recession in 2023. The bank added $1.1 billion to its loan loss reserves. This is a sharp change from last year when that number was negative.

What’s next: hold your hat Over the next week, 26 S&P 500 companies will report their fourth quarter results.

Apple CEO Tim Cook responded to angry shareholders by encouraging the company to cut salaries this year, reports my colleague Anna Cooban.

Cook received a total of $99.4 million in compensation last year. The majority of 2022 compensation (around 75%) was related to company equity, half of which was dependent on stock performance.

But after Apple’s stock fell nearly 27% last year, shareholders voted against Cook’s salary package.Although the votes are not binding, the Board’s Compensation Committee believes that Cook himself requested a reduction.

“The compensation committee has balanced Mr. Cook’s recommendations to adjust compensation in the light of shareholder feedback, Apple’s extraordinary performance, and the feedback it has received,” the company said Thursday at its annual mandate. said in the solicitation.

But don’t cry for Tim Cook just yet.This year, the executive stock compensation goal is $40 million. About $30 million, or three-quarters of that, is related to stock performance. The tech boss, who has headed Apple (AAPL) since 2011, is estimated to have a personal fortune of $1.7 billion, according to Forbes.

To the point: Apple shares, like other tech companies, plunged last year as coronavirus lockdowns closed some factories in China. Bottlenecks in his supply chain and fears that a slowing global economy could weigh on demand also weighed on the stock.

Angry investors believe the people at the helm of the company should also be paid less.

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