What’s Up With Corporate Earnings And Jobs?

It was the busiest week of earnings season last week. Despite the overall earnings picture continuing to deteriorate, the S&P 500 rose by over 1.6% for the week. A dovish press conference from Federal Reserve Chair Powell helped ignite the rally, but Friday’s blowout jobs report cooled the melt-up. According to FactSet, 70% of companies have exceeded earnings estimates, below the 10-year average of 73%. This week remains busy, with 94 S&P 500 companies scheduled to report.

Blended earnings, which combine actual with estimates of companies yet to report, are lower than forecasts at the end of the quarter and declined again last week. The high earnings growth rate for the industrials remains misleading since the airlines reported a loss in the fourth quarter of 2021 and posted a profit this quarter. While the index-level earnings picture worsened, several sectors saw improving expectations last week. Consumer staples, real estate, health care, and materials remain the four sectors expected to post higher earnings than forecasted on December 30th. The energy sector saw earnings estimates rise last week and retains the crown with the highest expected growth rate driven by increased energy prices, with expected earnings slated to increase by 58% year-over-year. On a related note, Berkshire Hathaway
BRK.B
continued to buy shares of Occidental Petroleum
OXY
(OXY) in 2022 and now owns over 20% of the company. A previous piece discussed why Warren Buffett’s Berkshire Hathaway could be adding to its holdings in Occidental Petroleum.

Compared to earnings, the blended revenues improved again last week and surpassed the expected level at the end of the quarter. Energy, industrials, real estate, consumer staples, health care, and consumer discretionary have better estimates than at the end of the quarter. Sales in the energy sector illustrate the robust increase in energy commodity prices.

With 50% of the earnings season complete, the blended earnings performance has underperformed expectations at the end of the quarter. Combining actual results with consensus estimates for companies yet to report, the blended earnings growth rate for the quarter weakened to -5.3% year-over-year, below the expectation of -3.2% at the end of the quarter. Expected earnings growth for the calendar year 2023 declined again this week and now stands at 3% year-over-year.

The communications services, technology, and consumer discretionary sectors were the most significant contributor to the decline in blended earnings for the S&P 500. Earnings misses by Alphabet (GOOGL) and Meta Platforms
FB
(META) impacted the communications services, while a miss by Apple
AAPL
(AAPL) weighed on technology. Lower-than-expected earnings from Amazon
AMZN
(AMZN) and Ford (F) sent consumer discretionary earnings lower. As discussed previously, margin pressures have become more evident, with sales coming in as expected but earnings disappointing during this fourth-quarter earnings season.

Outside of earnings season, in a decision with no real suspense, the Federal Reserve hiked short-term interest rates by 25 basis points (0.25%). Chair Powell’s comments were more dovish than market participants expected, which ignited a stock rally in hopes that the Fed’s tightening cycle might end sooner than expected. Alas, Friday’s spectacularly robust jobs report made things a little more complicated to end the week. Nonfarm payrolls soared by 517,000 versus expectations of 188,000, while the unemployment rate fell to a cycle low of 3.4%. Average weekly hours rose to 34.7, another sign of a resilient labor market.

While complaints that seasonal factors flattered the shockingly strong jobs data and the Federal Reserve will likely take the data with a grain of salt, even cutting the number in half leaves one with the same conclusion that the labor market remains tight. In addition, other labor market indicators, like initial claims for unemployment benefits, support the view that the labor market remains impressively resilient in the face of the Federal Reserve’s rate hiking cycle. Other economic data has softened into the start of the year, but the job market is not consistent with any fears that the economy might be in recession currently. While the odds still favor a recession in 2023, the case has weakened.

Markets expected only one more 25 basis points hike from the Fed and as many as two 25 basis points cuts by January 2024 after Powell’s press conference on Wednesday. After the blowout jobs report, 25 basis points in March and May hikes are forecasted, with one possible cut by January. While it would typically be less compelling shortly after the Federal Reserve meeting, Fed Chair Powell is scheduled to speak on Tuesday. Investors will be keen to hear how his views might have evolved since last Wednesday due to the payrolls report.

This week remains busy with earnings reports. Headline earnings deteriorated again last week and remained below estimates at the end of the quarter. Still, the market has been focused on the eventual earnings recovery and the rising odds that the U.S. might avoid recession. Companies will remain particularly sensitive to forward guidance from companies while the threat of recession in 2023 remains. Fed Chair Powell’s appearance on Tuesday takes on additional relevance in the wake of the breathtaking jobs report last week, especially with precious little other economic data on the docket.