New York CNN –
Everything has a season and now is the time to profit.
Over the past few weeks, investors have been entirely focused on inflation and Fed policy, but now market reactions are turning stronger on earnings (especially gaps) and weaker on economic data.
What’s happening: “We expect earnings to take center stage going forward,” Bank of America strategists Savita Subramanian and Ohsung Kwon wrote in a note on Friday. They noted that over the past three quarters, the S&P 500’s reactions to earnings shocks and misses have soared higher and have already outpaced the one-day market reaction to both CPI inflation and Fed meeting decisions.
Companies that missed both sales and earnings per share last quarter underperformed the S&P 500 by nearly six percentage points on average the next day, the biggest reaction to earnings misses on record.
Disney shares sank 13.16% last November – their lowest level in more than two years – when they missed profit estimates. Shares of Meta plunged 24% after reporting a third-quarter revenue decline in October, the company’s second straight quarterly revenue decline. And Palantir shares closed up more than 11% in November after narrowly missing estimates.
“We see this as a narrative shift in the market from the Fed and inflation to earnings: reactions to earnings are increasing, while reactions to inflation data and FOMC meetings are getting smaller,” Subramanian and Kwon wrote.
So we can expect some serious volatility over the next few weeks as companies report their fourth quarter corporate earnings.
Bank of America’s predictive analytics team analyzed earnings transcripts to calculate sentiment scores and found that corporate sentiment remained flat in the third quarter, well above their highs, pointing to a potential earnings decline going forward.
Similarly, companies’ references to better business conditions (specifically using the words “better” or “stronger” versus “worse” or “weaker”) remained well below the historical average, and mentions of optimism fell to the lowest level since the first quarter of 2020.
So far, the changes have been in a downward direction. Fourth-quarter earnings per share estimates for the S&P 500 have fallen about 7% since October. Early earnings reports from some of the biggest financial institutions point to a dismal quarter.
Bad news ahead: The expected earnings decline for the S&P 500 in the fourth quarter of 2022 is -3.9%, according to a FactSet analysis. If this is indeed the actual decline, it would mark the first earnings decline reported by the index since the third quarter of 2020.
Over the past few weeks, FactSet reported, earnings expectations for the first and second quarters of 2023 have shifted from year-over-year growth to year-over-year declines.
The latest: JPMorgan beat estimates for fourth-quarter earnings, but also increased the amount of money for expected loan defaults. The bank added $2.3 billion in loan loss provisions in the quarter, a 49% increase from the third quarter.
The move was prompted by “a moderate deterioration in the firm’s macroeconomic outlook, which now reflects a mild recession in the central case,” the report said. In a follow-up call, JPMorgan CFO Jeremy Barnum told reporters that the bank expects a recession to occur by the fourth quarter of 2023.
Bank of America ( BAC ) also beat profit expectations, but CEO Brian Moynihan said Friday the bank is bracing for rising unemployment and a recession in 2023. “Our base case scenario calls for a mild recession,” he said. The bank added a $1.1 billion provision for loan losses, a sharp change from last year when that number was negative.
What’s next: Hold on to your hats. Next week, 26 S&P 500 companies are scheduled to report fourth-quarter results.
Apple CEO Tim Cook has responded to angry shareholders by recommending that the company cut his salary this year, my colleague Anna Cuban reports.
Cook received total compensation of $99.4 million last year. Most of his 2022 pay – about 75% – was tied to company stock, with half of that dependent on share price performance.
But shareholders voted against Cook’s pay package after Apple shares fell nearly 27% last year. The vote is nonbinding, but the board’s compensation committee said Cook himself requested the reduction.
“The compensation committee balanced shareholder feedback, Apple’s exceptional performance and the recommendation that Mr. Cook adjust his compensation in light of the feedback received,” the company said in its annual proxy statement released Thursday.
But don’t cry for Tim Cook just yet. This year, the CEO’s goal is $40 million. About $30 million, or three-quarters, of that is related to stock price performance. The tech mogul, who has led Apple ( AAPL ) since 2011, has an estimated personal fortune of $1.7 billion, according to Forbes.
The bottom line: Apple’s share price, like that of other tech companies, collapsed last year as the coronavirus lockdown shut down some of its factories in China. Supply chain bottlenecks and concerns that a global economic slowdown will reduce demand also dragged down its shares.
Angry investors believe the man at the helm of the company should also see a pay cut.
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