Earnings Outlook: Show Us the Growth

  • Higher expected corporate earnings mask broad pressure under the surface. We see more earnings pain ahead and look for opportunities at the sector level.
  • U.S. Treasury yields surged and stocks dipped last week. Data confirmed the U.S. labor market is still tight. We see signs markets are adjusting to the new regime.
  • All eyes are on U.S. CPI inflation data out this week. Continued evidence of stubbornly high inflation could add momentum to the recent rise in bond yields.

Bond yields have jumped, and we think markets are at a key juncture as central banks are poised to hold tight on policy. As Q2 results begin, corporate earnings need to deliver on market expectations to support stocks, in our view. We see a key divergence in earnings forecasts: They have risen for a few tech firms, while the rest stagnate. Profit margins are shrinking, and we see more pressure ahead. So we get granular and favor sectors like healthcare within developed market stocks.

Split earnings outlook

Q1 earnings growth was flat to slightly negative, Refinitiv and Factset data show. That masks significant divergence: We see a common denominator between what’s driving market performance this year and earnings – the artificial intelligence (AI) buzz. S&P 500 earnings forecasts for the next 12 months have risen in recent months (dark orange line in the chart) along with the market rally driven by tech firms with the largest market capitalization. Stripping out those mega-cap tech stocks, forecasts are flat this year (yellow line). 2023 consensus estimates have been cut but remain well above our expectations. We expect Q2 data will be similar to Q1 as the reporting season kicks off this week, with a contraction hitting in the second half of 2023. We also assess profit margins, shaped by earnings and revenues, for cracks. Margins jumped during the pandemic when consumer demand for goods was strong and companies could push up prices as input costs soared.