With the Fed on the sidelines this week the primary catalysts came from earnings and economic data. Let's dive a little deeper into both.
Coming into this quarter analysts cut earnings estimates significantly, nearly 7% from the end of Q3. There was also a growing concern that as companies more formally issued 2023 guidance that there would be more significant cuts to come. At this point about a third of companies in the S&P 500 have released results and it seems like the bar had been sufficiently lowered ahead of the quarter once again. That is not to say the results have been really strong but they are definitely better-than-feared. According to FactSet Earnings Insight
~69% of companies that have reported have beaten estimates by an average of 1.5%. These are far below the recent averages however, I focus more on the 10yr averages of ~73% and 6.4%, given the distortions over the last few years.
Looking at guidance not everything has been roses, but we are not seeing a throw the baby out with a bath water, type of quarter by any means. Since the start of earnings season a couple of weeks ago the bottoms up analyst earnings estimates for 2023 have only been cut by ~1% to ~$225. I know we just started the year but since markets are forward looking the 2024 estimate is currently ~$250 and it has only come down a smidge as well. We'll continue to monitor this as we move forward.
Given how resilient economic data was in Q4 it is not terribly surprising that earnings are holding up as well. Let's go through some of the key themes. Guess who remains resilient, the consumer, bank and payments processors have said spending continues though has moderated. The shift from goods to services is still very apparent and commentary around travel remains very strong also evidenced by airline results. On the goods side, consumer products companies which have been raising prices over the last year are seeing volumes drop off.
Financial firms have been increasing provisioning and NCOs while other credit metrics have deteriorated slightly, but this is to be expected at this point in the cycle. Multiple companies have highlighted that these credit metrics remain below pre-pandemic levels.
Broadly we've heard that supply chains continue to improve which is allowing firms to work through some of their backlog. At the same time we're seeing an inventory normalization. This destocking is behind some of the weakness seen in the semis and chemicals. While there is some demand moderation much of the commentary suggests a turn later this year. Multiple firms have highlighted the pent-up/returning demand from China as a potential tailwind. We have also seen some of the FX headwinds reverse.
The other big theme has been cost cutting measures being enacted which is also helping to mitigate some potential earnings weakness. The layoff announcements are starting to come from companies outside of just technology. Staffing firm, Robert Half, acknowledged a slowdown in hiring activity and drawn out sales cycles, but broadly I'd say the commentary on their call was sanguine related to the labor environment.
Thus far this quarter is playing out in a very similar fashion to the last few, as we suggested it might in our Earnings Preview, Kicking the Can?.
One of the things that was different this time around was the price action ahead of earnings season. In the last few quarters equities were near YTD lows at the start of earnings season which wasn't the case this time around. We have rallied pretty significantly going into a very important week, with some of the largest companies set to report, so this does give us a little pause.