Revenue recession is about to begin

The first quarter earnings season is this week with several major banks reporting results on Friday.

While this earnings period largely ends with Memorial Day, analysts expect one clear takeaway — corporate America is in an earnings slump.

After earnings per share of S&P 500 companies fell 4.6% in the fourth quarter of 2022, earnings in the first quarter of 2023 are expected to fall 6.8% from a year earlier. According to data from FactSet.

“Analysts and companies are more pessimistic about their earnings outlook for the first quarter compared to historical averages,” FactSet’s John Butters wrote in a note.

“As a result, the S&P 500’s estimated earnings for the first quarter fell short of expectations at the start of the quarter today. The index is expected to report its largest decline in annual earnings since Q2 2020.”

With two straight quarters of year-over-year revenue declines, it’s pushing profits for the market’s biggest companies into recession.

By definition, the investor debate about what is “priced” in the market can never be resolved. After all, this is the market.

Whether this earnings slowdown confirms the obvious or serves as new information is a question for investors to grapple with. But the market’s behavior over the past year, with the S&P 500 enduring its steepest decline since 2008, suggests investors are favoring corporate decisions as they feed into what’s to come in the coming quarters.

In the first quarter, analysts cut earnings per share growth to 6.2%; Over the past decade, the average quarterly decline in earnings expectations has been 3.3%.

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Traders work on the floor of the New York Stock Exchange during morning trading on March 22, 2023 in New York City. (Photo by Michael M. Santiago/Getty Images)

The news isn’t expected to be better in the second quarter, with FactSet expecting Q2 earnings for the S&P 500 to fall another 4.6% from a year earlier. In the third quarter, revenue growth is expected to return.

The decline in the corporate world is not entirely surprising, as recent data from the manufacturing sector, the service sector and the US labor market suggest that the economy is nearing a recession.

After all, investors worried about an imminent U.S. recession for much of the past year as rising inflation and aggressive rate hikes set indicators warning of a future slowdown in growth.

But some strategists don’t think the market is pricing in a bleak outlook for profit. Hopefully investors will eventually heed the warnings sent by corporate bottom lines.

“Investors can expect a strong recovery next year with earnings shrinking in 2023, mainly in an effort to pay peak multiples on tank earnings,” Barclays strategist Venu Krishna wrote in a note to clients on Monday.

“However, we are determined [next twelve months] EPS cuts are far from over; Consensus estimates still look too optimistic a few months out, and a potential slowdown only increases the extent to which forward estimates overestimate actual earnings.”

As FactSet’s work flagged, earnings estimates for first-quarter earnings fell sharply while estimates for the full year remained relatively firm.

Investors still expect the S&P 500 to earn $219 per share in 2023; Barclays expects full-year earnings to come in closer to $200 per share.

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Revenue forecasts for the first quarter of this year have fallen sharply, while expectations for the balance of 2023 remain firm.  Barclays strategists expect that to change in the coming months.  (Source: Barclays)

Revenue forecasts for the first quarter of this year have fallen sharply, while expectations for the balance of 2023 remain firm. Barclays strategists expect that to change in the coming months. (Source: Barclays)

“Ultimately, we believe the market is still pricing in a ‘no landing’ scenario: the Fed will bring inflation under control (perhaps slightly above its 2% target), while economic growth will eventually rebound strongly from recession in 2024,” the firm wrote.

“This is an outcome that supports current consensus at best, and we don’t see it. Our base case for a shallow recession this year continues, and the history of recessionary bear markets (especially high inflation) is a guide, leaving both sides of the P/E multiple exposed to asymmetric downside risks.”

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