Daily Management Review

Profit Projections In The US Have Weakened As Corporates Examine Inflation Threats


Profit Projections In The US Have Weakened As Corporates Examine Inflation Threats
Corporate growth projections for the current quarter and 2022 are mainly dropping as oil and other supply costs rise and interest rates rise, as first-quarter results near their end.
High oil prices have bolstered profit projections for energy companies while raising profit margin concerns for many other S&P 500 industries.
Even while the first quarter's expected year-over-year profit growth has risen to 10.4 per cent from 6.4 per cent at the start of April, according to IBES data from Refinitiv, disappointing outlooks from Amazon.com, Netflix, and other key firms have stood out among recent reports.
Amazon.com reported a dismal quarter and outlook, citing increased expenses to manage its warehouses and deliver packages as the reason.
According to Refinitiv statistics, experts have reduced their overall projection for S&P 500 second-quarter profit growth to 5.6 per cent from 6.8 per cent at the beginning of April, but the full-year forecast has remained at 8.8 per cent.
Without the energy sector's growth, the 2022 growth estimate lowers to around 5 per cent, a significant impact for a sector that accounts for only 4 per cent of the S&P 500's market capitalization.
"There will be more downside given the oil shock that we saw," said Ohsung Kwon, U.S. equity strategist at BofA Securities in New York.
"It's going to take some time for this to play out," he said. "It's not just from energy; it's overall inflation, plus the higher rate environment."
To be true, in a quarter, negative corporate outlooks outnumber positive ones since corporations are cautious when providing guidance.
However, according to BofA data, the three-month ratio of above-consensus against below-consensus corporate guidance fell to its lowest level since June 2020 in April.
Stocks have fallen in recent weeks as investors fear the Federal Reserve may have to raise interest rates more aggressively to keep inflation under control. So far this year, the S&P 500 is down nearly 13 per cent.
The Federal Reserve boosted interest rates by half a percentage point on Wednesday, as expected.
According to recent data, monthly consumer prices in the United States surged by the greatest in 16-1/2 years in March, as Russia's war against Ukraine drove gasoline prices to new highs.
Companies' forward-looking statements have done little to calm market anxieties.
"If anything, the comments from CEOs are just reflecting the same macro-economic concerns," said Shannon Saccocia, chief investment officer at SVB Private Bank. "They have been very conservative because they have very little transparency on how well engineered an economic slowdown will be."
According to Refinitiv statistics, anticipated 2022 S&P 500 energy sector earnings growth has increased to around 93 per cent from around 65 per cent since the beginning of April. Over the same time span, the S&P 500's consumer discretionary earnings growth projection has dropped from 17 per cent to around 7 per cent.
"If inflation peaks, we'll be OK and we'll continue to see growth," said Peter Cardillo, chief market economist at Spartan Capital Securities in New York. "If not, then it's going to be a problem. Companies are going to have to do cost cuttings even though they might have earnings that on the surface look good."