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Below is a transcript of this week’s video:

Another earnings season shifts into gear this week, providing some of the first glimpses into profit trends for 2023. With ~6% of companies reporting so far, the blended year-over-year earnings growth estimate for the S&P 500, which combines actual results with consensus estimates for firms that have yet to report, currently sits at -6.5%. These declines are expected to be led by the materials, healthcare and technology sectors, while consumer discretionary, industrials and energy are expected to provide some offsetting growth. Within consumer discretionary, Amazon is currently expected to be the largest contributor to earnings growth, if Amazon was excluded, the expected earnings growth rate for the sector would fall to 3.5% from 35%.

Analysts have grown increasingly pessimistic in their earnings outlooks for the first quarter. If the current consensus earnings decline estimate of -7% for the S&P 500 holds true, it will mark the largest earnings decline by the index since Q2 ‘20. Broadly speaking, earnings held up well in most of 2022, as the average company was quite successful at boosting revenues by passing along price increases.  These tailwinds faded in the 4th quarter of 2022. Looking forward, the start of 2023 appears to be one of ongoing thin margins without a top-line lift as an offset. Earnings growth estimates are expected to be negative for both the first and second quarters of 2023 and two quarters or more of negative earnings growth is a common earnings recession definition.

So, top-line and bottom-line pressures again appear to be coinciding to undermine the ability of the average company to meet earnings growth expectations. The similarities between this and past weakening economic cycles are becoming more and more apparent. Earnings expectations often follow our leading economic indicator. Also looking at earnings during economic recessions since the 1900, the average recession has historically been accompanied by a 15% decline in earnings.

Analysts have been thinking this through, but they may not have yet put through the entire adjustment. The 2023 earnings per share estimate for the S&P 500 now sits just around $220, down from its peak at $252 per share earlier last year. It is important to note that this is an aggregate of analysts’ estimates for the individual underlying companies that make up the index. An average of estimates from Wall Street strategists, who’s approach is more top-down than bottom-up, currently sits at $209 a share for 2023. This is much closer to the typical earnings decline of 15% that has historically occurred during recessions.

This earnings season, Bank earnings and the latest details on deposits will be closely examined following volatility in the sector. Four of the nation’s largest banks reported last week (JPMorgan, Citi, WellsFargo, PNC) demonstrating the resiliency of the industry’s giants amid the challenges that tested regional lenders. Although the large banks reported deposits declining from the previous quarter, many lenders had been losing depositors to money market funds that were willing to offer higher yields as the Federal Reserve boosted interest rates which can be seen by the chart on the left. In the coming weeks, results from regional banks will be highly scrutinized for how they were able to weather the storm in Q1 where the expectation are that they would have seen much larger outflows driven by the volatility in the sector.

So to summarize, as Q1 earnings season kicks into gear, consensus is calling for a high-single-digit year-over-year decline in profits for the S&P 500. Consensus earnings estimates appear to be negative for the first half of 2023, meeting the common definition of an earnings recession. With an economic recession likely on the horizon as well, earnings could have further room to fall as the macro environment deteriorates. Earnings reports out of the banking sector will be closely watched for details on deposit trends following several bank failures. And additional deterioration in earnings could lead to further downside in this bear market, justifying an underweight risk posture.