Earnings reports are coming thick and fast, showing how companies fared in the first few months of the year, but analysts and investors are far more interested in what the future holds. As the old saying goes, past performance is no guarantee of future results, and investors on Wall Street know that better than anyone.
"Q1 isn't about Q1," wrote Bank of America strategists Savita Subramanian and Ohsung Kwon in a recent note. They expect a quarter that's largely in-line with estimates, but "the focus will be on guidance and tighter credit conditions," they said.
Clocking a decline: As of this week, FactSet data forecasts that Q1 earnings of the S&P 500 will decline by 6.5% on average, year-on-year. That would mark the second quarterly earnings decline in a row and the largest across the index since the second quarter of 2020.
But even as earnings are forecast to slump to their lowest level in three years, investors fear the worst is yet to come. "We don't think that reflects the coming damage yet," wrote analysts at BlackRock this week. "Corporate earnings expectations have yet to fully reflect even a modest recession," they said. They'll be listening closely to comments from CEOs on the outlook for the rest of the year.
Choppy waters: Traders are searching for direction in a sea of choppy economic data, volatile markets, heightened interest rates and predictions of recession. They don't want to hear companies tell them where they were before, they want to know what lies ahead.
Johnson & Johnson shares fell by nearly 3% even after the company reported earnings and revenue that beat expectations. The likely reason? Negative forward guidance.
J&J, considered a bellwether for the health industry, slightly lowered its pharmaceutical sales target for 2025 (though it raised its overall guidance). The company's executives said on a call that currency headwinds are to blame. Foreign exchange hiccups, they said, cost their pharmaceutical business about $3 billion last year.
CapEx and Buybacks: Analysts will also be closely watching for buyback announcements — when companies buy back their own stock to reduce the number of shares and boost the price — and how much is being spent on capital investment.
Historically, when credit dries up, traders sell shares of companies that benefit from capital expenditures — investments made in things like buildings, equipment, and technology, said Bank of America analysts.
But after a decade of reduced capital expenditures, more companies are planning to make these investments anyway, even though credit is tight, wrote the analysts.
In the wake of the global financial crisis, about 38 cents for every dollar generated or borrowed by a company was used for capital expenditures while 24 cents was spent on buybacks, reports Bank of America. That was up from 13 cents per dollar spent on buybacks before the 2008 crisis, they said.
President Joe Biden has been providing incentives for companies to invest in capital development, and this, along with tighter credit, may result in less money being spent on buybacks and more on bigger projects. While this could be beneficial for the economy in the long run, it could have a negative impact on stock prices in the short term.
Coming up: This week, companies from a broad range of sectors will report their first quarter results, accounting for 26% of all earnings. By the end of the week, 60% of earnings from financial companies should be out.
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