Head of Equity Strategy
Summary: Next year is all about the immense wage pressures will continue to compress net profit margins offsetting the revenue growth and taking corporate earnings lower. Analysts are already revising down their earnings expectations for the next 12 months as economic uncertainty and margin compression evident in Q3 earnings have increased the downside risks on earnings. As a result, 2023 could be another difficult year for equities.
Earnings recession in 2023 is what matter the most
The Q3 earnings season is slowly coming to an end with the main conclusion being that companies are still overall doing well, but that margin compression is setting in with increasing force. Companies are highlighting wage pressures as their biggest concern and it is also the main dynamic that allow margin compression to continue into 2023 taking earnings down despite inflation lifting revenue growth. The chart below shows how wage growth in the US and Eurozone are trending higher to historical high level.
The story in 2022 has been the revaluation of equities due to the interest rate shock that followed the Fed pivot on whether inflation was temporary or not going with inflation being more structural and for longer than initially estimated. Falling equities have predominately been an interest rate dynamic and less so an earnings dynamic. The reason why equities have not fallen more relatively the big move in interest rates is the that the equity risk premium has not expanded dramatically. But that could quickly change in 2023.
S&P 500 earnings expectations for the next 12 months are coming down and are currently 4% lower than their recent highs suggesting that sell-side analysts are beginning to revise down earnings as a function of higher interest rates increasing financing costs and higher wage pressure compression the net profit margin. An earnings drawdown is typically associated with increased probability of a recession and that in itself drives the equity risk premium higher providing the ugly cocktail of both lower earnings and a lower multiple next year making 2023 another difficult year for equity investors.
Next week’s earnings releases
The list below shows the most important companies reporting earnings next week. Highlight of the week is likely earnings from Kuaishou Technology and Xioami as Chinese equities have recently been lifted by the ‘Xi pivot’ on the country’s strict Covid policies. Increasing regulation of the private sector and especially the technology sector is still a headwind and we still see elevated uncertainty around whether China can manage to kickstart the economy. The two earnings results are not expected to be blockbusters themselves but the outlook will tell us whether companies have increased their sentiment on the Chinese economy.
2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
