The profit outlook is deteriorating sharply for companies in the S&P 500 index — yet analysts can’t raise their stock-price targets fast enough.
Consider this the stock-market disconnect of 2023.
The two seemingly incongruous trends show how much equity prices are rising on speculation that the Federal Reserve is nearing the end of its most aggressive rate-hike cycle in decades. That bodes especially well for valuations of growth and tech stocks, which saw Apple Inc., Alphabet Inc. and Amazon.com Inc. has held even after its disappointing earnings report.
But the extent to which analysts are raising stock-price targets while lowering earnings estimates is puzzling to those accustomed to looking at the market on the underlying strength of corporate America.
“Interest rates have gone down and your discount rate has gone down, so even though your income isn’t increasing, you can set a higher price.” [on the stock] Only because of the low discount rate,” said Krit Thomas, global market strategist at Touchstone Investments. “They’re saying, ‘Hey, we’re going to be out of this within six to 12 months, so let’s look at this.’
The fourth-quarter reporting season has done little to support optimism about fundamentals. Earnings from energy to consumer discretionary sectors are coming in below pre-season estimates and companies are dialing back the outlook on expectations that growth will slow. In fact, Bloomberg Intelligence’s models suggest it cut its earnings guidance for the first quarter by the most since at least 2010.
This forces analysts who stick to rosier estimates to follow. Citigroup Inc. Data compiled by Reuters shows that of all the changes analysts made to their earnings estimates last month, only 37% were upgrades. The level has been associated with the last three economic downturns and is 30% below the historical average.
“To us, the 2023 analyst numbers looked too aggressive,” Drew Pettit, director of ETF analysis and strategy at Citigroup, said in an email. They are “quickly being modified to better match economic reality.”
Considerable uncertainty remains about the direction of the economy, especially as Friday’s sharp job growth numbers indicate that it is still expanding at a solid pace. Overall, however, economists broadly expect growth to slow or even contract due to tighter financial conditions.
“We’re starting to see some of these companies coming out and giving less than ideal guidance on growth,” said Brian Jankowski, senior investment analyst at Fort Pitt Capital Group. “We are starting to see business forecasts for growth that are better with GDP predicted to be much lower.”
The stock market has been largely sidelined by speculation that interest rates are nearing their peak of the cycle, a view that was supported by the Fed’s decision on Wednesday to ease the pace of its moves. Sell-side analysts covering S&P 500 companies — and already skewing bullish — have responded by raising their share-price estimates at the fastest pace since the spring of 2021.
The Fed’s central role in the outlook for equity prices was underscored by how well markets performed this week in the face of some negative earnings surprises from major companies.
Apple reported a sharper sales decline in its holiday period than Wall Street had expected, while Ford Motor Co reported a drop in profit amid continued supply shortages. Google parent Alphabet’s results indicated less demand for its search advertising during a slowing economy.
Yet on Friday the major stock indexes were little changed for most of the day before closing lower. Still, the S&P 500 posted its second straight weekly gain.
Elsewhere in corporate earnings:
Asia:
HDFC shares rose after the Indian lender posted an 18% growth in personal loans in the third quarter as lenders in India continue to benefit from rising loan demand. The company reported net income for the three months through December that met average analyst estimates.
Neverv jumped after its revenue for e-commerce and content beat estimates despite a lack of overall fourth-quarter profit
EMEA:
Intesa Sanpaolo shares declined even after the Italian lender reported fourth-quarter net income that beat average analyst estimates. According to KBW the bank’s outlook was not clear enough to “excite the market”.
Sanofi fell after the French pharma giant reported fourth-quarter results that missed estimates, which analysts attributed mainly to weak sales for the vaccines unit. Jefferies said guidance for 2023 EPS growth could also disappoint, and suggests lowering consensus estimates
Of America:
Apple shares reversed course from gains as analysts said the company’s services business remains an area of strength. Shares were down after the iPhone maker reported first-quarter revenue that missed expectations, hurt by macro headwinds and supply challenges
Shares of Ford declined after the automaker missed its fourth-quarter profit forecast. Reaction among analysts was mostly negative, with some attributing the omission to company-specific issues. Meanwhile, Deutsche Bank cut its sell recommendation on the stock, noting “significant operating shortfalls”.
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