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Thoughts From Last Week
While results diverged from sector to sector, forward guidance among most companies is pointing towards a softer economic environment as demand slows and inflations remains persistent.
With over 90% of the S&P 500’s market cap reported, we are tracking 4Q22 operating earnings per share (EPS) of $49.37, representing y/y and q/q declines of 13.0% and 1.9%, respectively. Furthermore, S&P 500 operating margins are sitting at 10.8%, down from 13.4% in 4Q21 and 11.3% in 3Q22. At the sector level, energy and utilities have led the pack this earnings season due to higher oil and gas prices. At the same time, industrials are set to record another quarter of y/y growth due to resilient spending on services offsetting softening manufacturing demand. However, consumer discretionary, communication services and information technology – all of which are levered to non-core spending – had another tough quarter, as higher labor costs and souring consumer confidence weighed on profits. While results diverged from sector to sector, forward guidance among most companies is pointing toward a softer economic environment as demand slows and inflation remains persistent.
Although the corporate outlook has deteriorated, the economy has continued to hum along in 2023. Last Friday’s January personal income and outlays report indicated personal income increased 0.6% m/m and consumer spending increased 1.8% m/m, with the personal saving rate rising to 4.7%. However, much of the boost in personal income and personal saving was driven by the 8.7% Social Security cost-of-living adjustment and higher compensation, which should wane as wage growth moderates. Additionally, while consumer spending remains strong, the steep increase in credit card debt highlights the degree to which spending is being supported by borrowed money. The consumer’s increasing reliance on borrowing should make further increases in consumer spending unsustainable, suggesting, similar to management commentary, that a slowdown may be lurking around the corner.
Source: BEA, J.P. Morgan Asset Management.