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Perspectives

Are We in the Eye of a Hurricane?

by Fortem Financial April 3, 2023

U.S. equities were higher for the third week in a row (S&P 500 +3.5%). Headlines were sparse, with lower volatility around banks. Flows to money market accounts eased from the prior two weeks. Best sectors were energy (+6.2%) and consumer discretionary (+5.6%); worst sectors were communication services (+1.5%) and healthcare (+1.8%).

 

Where Do Earnings Expectations Stand As We Head Into 1Q Earnings Season?

With the first quarter earnings season set to begin in a couple of weeks, 2023 EPS currently sits at $221.44. This figure still remains about 10% higher than our estimate but represents a growth rate of just 1% for the overall index in 2023. The 2024 number of $248.11 suggests that the consensus believes earnings will normalize next year and return back to a 10-12% growth rate. We believe this remains a very optimistic scenario.

2023 and 2024 S&P 500 EPS Progression Chart

EPS Expected To Decline -5.0% In The First Quarter

Overall earnings estimates for the first quarter are expected to decline by -5.0% which would be the largest decline this earnings cycle thus far using consensus estimates. Furthermore, the street also believes this will be trough earnings growth before reversing course in the second quarter. As it stands today, 7 of the 11 sectors are expected to decline led by materials at -33.5%. Discretionary on the other hand is expected to grow 36.4%.

S&P 500 Q1 2023 Expected EPS Growth Rates Chart

Sales Expected To Grow 1.6% In 1Q

The top line for the S&P 500 is expected to grow 1.6% with financials expected to lead the way at 9.1% followed by discretionary and industrials at 6.4% and 5.6% respectively. We are skeptical of the financial sector data knowing the issues banks faced in the month of March. On the opposite side, materials and energy are expected to be the laggards at -8.3% and -5.8%. The decline in commodity prices likely plays a role in the declines for these two sectors.

S&P 500 Q1 2023 Expected Revenue Growth Rates Chart

Since March 1st Energy Earnings Have Declined More Than Financials

With the second largest bank failure in the history of the United States occurring during the last month, we felt it was worth looking at the net income revisions to understand the impact on earnings. Our initial take is that the street is suggesting not much. The energy sector saw greater revisions at $-4.4bn than the financial sector at –$3.7bn which came as a surprise and the cost saving measures tech companies implemented have not moved estimates higher. We continue to believe earnings will come down further as the year progresses as the -$9bn decline is minimal after the Fed had to extend loans.

2023 Net Income Revisions by Sector Since 3-1-2023

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments. Data provided by Refinitiv.

 

Sincerely,

Fortem Financial
(760) 206-8500
team@fortemfin.com

 

 

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