Corporate Earnings Take a Holiday
This may be the third quarter where corporate profits dropped. But things may be better than some see.
Is a recession on the immediate horizon? By Bloomberg’s reckoning — measuring first-quarter earnings of the S&P 500 — it is. Profits are down 3.7% year over year on average. “While data compiled by Bloomberg Intelligence shows that 78% of firms surpassed forecasts, that’s less impressive than it sounds, given analysts had slashed their expectations before the season kicked off,” the report said.
This is supposedly the second straight quarter of earnings declines and more the potential for more doldrums through the third quarter of 2023, “a longer profit recession than during the pandemic.”
Along with the concern over profits have been tens of thousands of job cuts, downward pressure on margins as less demand crimps pricing power, and then problems in the economy coming back onto banks, especially small ones, with CRE mortgage defaults hurting that sector.
Nevertheless, maybe things aren’t exactly quite as bad as they seem.
One problem with looking at the S&P 500 is that it’s normally treated as a market cap-weighted index. A small handful of mostly tech companies at the top have a big sway — the 10 largest entries on the index make up 27.9% of the index’s total value. Getting an insight with the weighting can be difficult.
However, according to data from S&P Global Market Intelligence, on an average per-share basis across the stocks of the S&P 500, net income is 50.29 in the first quarter of 2023, up from the 40.62 of 2022 Q4, which in turn was down from Q3 of 2022.
The recent growth is even in the face of falling revenue per share. Diluted earnings per share was the highest it’s been since the fourth quarter of 2021.
Or look at corporate profits before taxes as estimated by the U.S. Bureau of Economic Analysis for all corporations, not just public ones. They dropped steadily and sharply from the second quarter of 2022 to the fourth quarter, with 2023’s Q1 not yet available. And yet even that Q4 relative low point was higher than any quarterly corporate before-tax profit pre-pandemic.
Jobs have been strong and consumer spending has maintained its activity. So, perhaps it may not be time for a truly doom-and-gloom outlook.