Forget inflation, it's all about profit

Forget inflation, it’s all about profit


For everything there is a season and now is the time of profit.

For the past several weeks, investors have focused squarely on inflation and Federal Reserve policy, but now market reactions are increasing for earnings (especially rulings) and less for economic data.

What’s going on: “We expect earnings to take center stage going forward,” Bank of America strategists Savita Subramanian and Ohsung Kwon wrote in a note Friday. They noted that over the past three quarters, S&P 500 reactions to earnings advances and errors have skyrocketed and have now outpaced the one-day market reaction to CPI inflation and IPC policy meeting decisions. Fed.

Companies that lost 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 losses on record.

Disney shares plunged 13.16% last November, their lowest level in more than two years, when they missed earnings estimates. Shares of Meta plunged 24% after showing a third-quarter revenue decline in October, the company’s second straight quarterly revenue decline. And Palantir shares closed down more than 11% in November after only slightly missing estimates.

“We see this as a narrative shift in the Fed market and earnings inflation: Earnings reactions have been on the rise, while reactions to inflation data and FOMC meetings have gotten smaller,” Subramanian and Kwon wrote.

Therefore, we can expect some serious volatility over the next several 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 held steady in the third quarter, far from its highs, which points to a possible fall in earnings in the future.

Similarly, companies references to better trading conditions (specific use of the words “better” or “stronger” vs. “worse” or “weaker”) remained well below the historical average, and mentions of optimism fell to the lowest level from the first quarter of 2020.

So far, the swings have been to the downside. 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 estimated earnings decline for the S&P 500 in the fourth quarter of 2022 is -3.9%, according to a FactSet analysis. if that’s the real The drop will mark the first drop in earnings reported by the index since the third quarter of 2020.

Over the past several weeks, FactSet reported, earnings expectations for the first and second quarters of 2023 have shifted from year-over-year growth to year-over-year decline.

The last: JPMorgan beat fourth-quarter revenue estimates, but also raised the amount of money for expected loan defaults. The bank added a $2.3 billion provision for credit losses in the quarter, an increase of 49% over the third quarter.

The move was prompted by a “modest deterioration in the company’s macroeconomic outlook, which now reflects a mild recession in the core case,” the report said. In a later call, JPMorgan CFO Jeremy Barnum told reporters that the bank expects a recession to hit in the fourth quarter of 2023.

Bank of America (BAC) also beat gains expectations, but chief executive Brian Moynihan said Friday the bank is bracing for rising unemployment and a recession in 2023. “Our baseline scenario is a mild recession,” he said. The bank added a $1.1 billion provision for loan losses, a sharp reversal from last year when that number was negative.

Whats Next: Hold on to your hats. Over the 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, reports my colleague Anna Cooban.

Cook received $99.4 million in total compensation last year. The vast majority of his 2022 compensation (about 75%) was tied to company stock, with half contingent on stock price performance.

But shareholders voted against Cook’s salary package after Apple shares fell nearly 27% last year. The vote is not binding, but the board’s compensation committee said Cook himself requested the reduction.

“The compensation committee balanced shareholder feedback, Apple’s exceptional performance, and a recommendation from Mr. Cook to adjust his compensation in light of feedback received,” the company said in its annual proxy statement released Thursday.

But don’t cry for Tim Cook just yet. This year, the executive’s stock award target is $40 million. Approximately $30 million, or three-quarters, is tied to stock price performance. The tech chief, who has run Apple (AAPL) since 2011, is estimated to have a personal wealth of $1.7 billion, according to Forbes.

The bottom line: Apple’s share price, like other tech companies, plunged last year as coronavirus lockdowns shuttered some of its factories in China. Supply chain bottlenecks and fears that a global economic slowdown would hurt demand also dragged shares lower.

Angry investors believe that the person at the helm of the company should also see a drop in salary.

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