Earnings season in the US has delivered "weak" surprises as S&P 500 companies' profits and margins are only slightly ahead of forecasts.
The helpful pessimism of analysts has meant earnings beats were a regular occurrence. However, median 'surprises' were only 3.3 per cent for profits and 0.8 per cent for sales in the last quarter, leading to UBS’s analysts to forecast big declines and downgrades in the near future.
The bank's global strategy team said it was the weakest earnings reports since 2000 and pointed to a potential 15 per cent drop in earnings per share for S&P 500 stocks, although this figure excluded the stronger financial and energy companies.
It added: “We see further downgrades to "hockey stick" projections amid still weak growth and cost pressures – with recession risk as the ultimate driver of larger earnings declines."
Earlier this month, investment bank Morgan Stanley also said earnings expectations for major US companies were 10-20 per cent too high.
The S&P 500 is up 5 per cent this year, even with the recession forecasts for the US. It has been dominated by the major tech firms Apple (US:AAPL), Microsoft (MSFT) and Amazon (AMZN). Apple missed sales and profit forecasts, Microsoft missed on sales and Amazon beat expectations for both, although analysts expect a poorer Q1, as per FactSet-compiled consensus.
Investors have jumped back into tech stocks in recent weeks as hopes climbed on the US Federal Reserve slowing interest rate rises. At the same time, the tech giants committed to improving profitability, slashing tens of thousands of jobs in reaction to institutional investor pressure.
The real world implications of the weaker earnings signals were laid out by the UBS team: “The downgrades have been worse than the earnings cuts in every slowdown/soft landing at this stage (since late 80s),” it said. A soft landing refers to a gradual drop in inflation and the economy shifting back into a growth phase without the pain associated with higher interest rates.
“The peak to trough slide in EPS [forecasts] thus far has been worse than the November 2007 to April 2008 falloff that preceded the eventual GFC earnings collapse,” the analysts added.
