Companies’ Earnings Forecast: Reasons for Concern

After a series of pessimistic forecasts from various companies, investors may be questioning the sustainability of the ongoing stock market surge.

Looking at the actual results for the fourth quarter, which have been pouring in since early January, a positive picture emerges. According to Evercore, aggregate sales for S&P 500 companies that have reported have surpassed analysts’ estimates by 1.4%. When excluding the impact of large, one-time expenses faced by banks and other financial companies, aggregate earnings per share have also exceeded expectations by a similar margin.

However, despite these positive figures, corporate managements have exhibited a negative outlook for the future.

For the current reporting season, the London Stock Exchange Group reports that 75 S&P 500 companies lowered their financial forecasts prior to releasing their results. In contrast, only 37 companies made positive preannouncements. While this ratio of about 2 to 1 does not necessarily deviate from historical trends, it does not paint a picture of increasing confidence among companies regarding their profits.

Furthermore, even companies that did not make preannouncements have conveyed a somewhat pessimistic sentiment about their performance for the rest of the year. This includes Texas Instruments, a prominent chip maker catering to various industries. They informed analysts to anticipate sales of $3.6 billion for the current quarter, which stands 11% below the previous consensus on Wall Street.

In light of these developments, investors are left to ponder the trajectory of the stock market in the face of cautionary company outlooks.

Weakening Demand and Lower Profit Margins

Management has acknowledged that there is a decline in demand from auto manufacturers and industrial customers. This is primarily due to higher interest rates, which have forced consumers to cut back on their spending. Unfortunately, this poses a challenge for the company’s profits, as they are unable to reduce costs accordingly. As a result, analysts have adjusted their financial forecasts, reducing their projections for EPS for the current quarter by a significant 24% since the end of December, according to FactSet.

Alphabet’s Focus on Sustaining Growth

Meanwhile, Alphabet, the parent company of Google, continues to experience growth in its various businesses. The company reaffirms its commitment to maintaining healthy growth based on its larger revenue base. However, it is worth noting that some areas of Alphabet’s advertising business outside of YouTube have only achieved single-digit increases in revenue during the fourth quarter. This raises concerns about the overall growth rate of the company’s revenue. Evercore analyst Mark Mahaney cautions against assuming high revenue growth and advises respecting the law of large numbers.

Stock Performance

Both stocks, which had been on an upward trend before their earnings disclosures, have experienced declines since the release of the numbers. These negative signals are causing concern in the stock market. The market is particularly vulnerable as it has risen by 18% since a low point in late October. This high level of optimism regarding earnings may prove to be excessive, which could lead to a downward trend in other stocks as well.

Upcoming Reports

Investors are eagerly awaiting the release of earnings reports from Amazon.com, Apple, and Meta Platforms after the close on Thursday. These reports will hold significant importance for the entire index, providing insights into the performance of these key players.