(Toronto) Experts believe the approaching new earnings season will be overshadowed by the broader economic climate, with interest rates and inflation data more closely watched than individual company reports.
And for their part, several companies are reporting a lackluster earnings season for a wide variety of reasons, many of which are global.
With economic data showing a slowdown at the end of 2022 and economists divided on whether 2023 will see a recession or a soft landing, corporate earnings will provide insight into how companies have weathered the final quarter of the year – and what to expect in the year ahead.
“There’s no shortage of headwinds impacting earnings, such as reduced demand, bloated inventory and higher costs,” said Lesley Marks, director of equity investments at Mackenzie Investments.
For example, exercise apparel maker and retailer Lululemon raised its revenue forecast but lowered its margin forecast, saying the company was navigating a “dynamic macro environment”. The maker of luxury parkas Canada Goose has previously revised its outlook for 2022 due to a drop in sales in China.
Some companies say earnings in the last quarter of 2022 will be affected by weather, such as Cenovus Energy, which expects its refinery output to be lower due to extreme winter weather, operational issues and third-party pipeline failures.
However, some believe the market might be pleasantly surprised by the overall gains.
“There’s generally a pessimistic outlook as we head into earnings season, in good times and bad,” said Michael Currie, senior investment advisor at TD Wealth Management. He believes that pessimism is often exaggerated.
Right now, the overall economic picture of inflation and interest rates is far more important to investors than individual earnings reports, Currie added.
A less likely rally
In 2022, investors were still waiting for another adverse event, said Greg Taylor, chief investment officer at Purpose Investments. They anticipated a slump each new earnings season, then rallied with relief when results were better than expected.
This situation appears to be repeating itself heading into the first earnings season of 2023, Taylor observed, but it remains to be seen whether the results will offer anything for an eventual rally.
“It feels like companies have done a decent job of controlling spending,” he noted.
However, markets have started 2023 with a rebound, so if there is a recovery in relief, it could be moderate, as it will not follow a low similar to those seen in previous earnings seasons, it said. he noted.
Much of the focus this season will be on what companies have to say about their outlook for 2023, said Angelo Kourkafas, investment strategist for the firm Edward Jones.
“There is a lot of macro uncertainty and investors will be looking for signs, looking for any kind of direction for the year,” he explained.
Mme Marks pointed out that market expectations for 2023 results look a little high right now, but she believes investors could lower the bar once they see the companies’ outlook from the fourth quarter results.
“It will be interesting to see if, come fourth-quarter earnings reporting season, we see those earnings expectations start to come down for this year,” she said.
Some of the early financial reports that came out turned out to be correct, Taylor said, with revenues remaining strong even as margins began to falter. But the results of US banks are the ones everyone is waiting to really watch, he said.
“There’s some nervousness and everyone is still trying to figure out how the consumer is going to deal with higher mortgage rates and higher interest costs,” he explained. But this […] could be a chance for people to sell on the rumor and buy on the news. »
So far, companies have been relatively silent on earnings forecasts, Taylor observed.
He predicts a wider-than-usual dispersion of earnings across companies and industries, which will further favor individual stock picking among investors.
Downward revisions during the year?
Clothing retailer Aritzia’s earnings, released on Thursday, are a good example of how some companies have struggled with inventory and demand amid geopolitical volatility, Ms.me marks.
The company has seen sales increase, but it is also caught with bloated inventory.
Although some companies have already signaled that their profits could be squeezed, Kourkafas thinks there is room for good news.
“We know, based on the back data (that) consumer demand held up pretty well in the fourth quarter of last year, so I guess, given that the bar has been lowered heading into the season results, that the profits could be decent,” he analyzed.
However, Kourkafas believes earnings are still at risk of downward revisions as the year progresses.
“I think the earnings risk is clearly in front of us,” he said. I don’t think this is fully reflected in the current consensus estimates. »
Others agree that the new year will continue to see the volatility that characterized 2022.
“2023 is shaping up to be a bumpy, boring and below average year,” predicted Ashish Utarid, assistant vice president of investment strategy at IG Wealth Management.
However, he believes investors are approaching earnings with some optimism, having already priced in the expected decline in growth six to eight weeks ago.
“The S&P 500 has had a pretty good rebound over the past month,” he said. So people are a little more optimistic […] despite a manufacturing recession and (a) profit recession. »