US banking earnings disappoint and what to expect next week

Margin compression is main theme in Q4 earnings season

The Q4 earnings season has started today and will ramp up next week before the big show starts in the following week. Margin compression was the theme of Q3 and will definitely be the key theme again in Q4. While commodities have stopped galloping higher wage growth has taken over as the next headache for CEOs cutting into margins. With consumer spending coming down in volume terms we have now reached a limit in which companies can no longer pass all of inflation on. The casualty is operating margins. So watch Tesla in the last month cutting prices aggressively across all countries in the range between 5-20%. When you are running a 25% gross margin business that will hurt earnings. Analysts are still not reflecting this reality expecting Tesla to grow earnings 24% y/y this year.

In the S&P 500 Index 12-month forward EPS estimates are only down 4% from the peak suggesting an equity market that broadly does not expect a recession but rather a soft landing with the Fed pausing after two rate hikes of 25 basis points. Analysts expect EPS in S&P 500 to rise 10% over the next 12 months despite the 4% reduction in those estimates. This scenario seems highly unrealistic and thus 2023 is likely to be paved by negative surprises.

The list below shows the most important earnings releases next week with the three most important to watch being P&G, Netflix, and Sandvik.

P&G reports Q4 earnings on Thursday before the market open with analysts expecting revenue growth of -1.1% y/y and EPS of $1.59 down 4% y/y suggesting that volumes are being hit by inflation and that analysts expect P&G to see their operating margin decline q/q. The potential upside for P&G on its outlook is the reopening of China.

Netflix reports Q4 earnings on Thursday after the market close with analysts expecting revenue growth of 1.7% y/y as streaming services are still facing headwinds post the pandemic. EPS is expected at $0.51 down 67% y/y. The things to focus on for investors are user growth, updates on its advertising business, and user engagement figures relative to recent content launches.

Sandvik, the Swedish-based manufacturer of tools for metals working and rock excavation, reports Q4 earnings on Friday before the market open. Analysts expect revenue growth of 4.6% y/y and EPS of SEK 3.51 up 11.5% y/y. We expect a positive outlook for Sandvik as the commodity super cycle is intact delivering strong tailwinds for capital expenditures in the global mining industry benefitting suppliers such as Sandvik.

• Tuesday: Sartorius Stedim, Morgan Stanley, Goldman Sachs, Interactive Brokers
• Wednesday: EQT, Charles Schwab, PNC Financial Services, Kinder Morgan
• Thursday: Procter & Gamble, Netflix
• Friday: Investor, Sandvik, Ericsson, Schlumberger