Forecasts show U.S. earnings decline in second quarter

[June 24, 2023]  By Caroline Valetkevitch

NEW YORK (Reuters) - Forecasts for second-quarter U.S. earnings still look gloomy after a much-better-than-feared first quarter season as the likelihood of further interest rate hikes this year creates more potential risks for companies.

Analysts expect earnings for S&P 500 companies to fall 5.6% in the second quarter from a year ago, according to IBES data from Refinitiv.

Year-over-year earnings rose 0.1% in the first quarter, based on data Friday, much better than the forecast for a 5.1% drop at the start of the reporting season. The improvement followed upbeat results from a host of big names including Microsoft Corp and Apple Inc.

Fourth-quarter 2022 earnings for S&P 500 companies declined 3.2%, so a first-quarter profit fall would have been a second straight quarterly decline, which some strategists call an earnings recession. The last one occurred when COVID-19 hit corporate results in 2020.

The second-quarter season does not get rolling until the middle of July, but it is now becoming clearer the Federal Reserve likely has not reached the end of its tightening cycle.

Fed Chair Jerome Powell said in remarks to lawmakers in Washington this week that the outlook for two more 25-basis-point rate increases are "a pretty good guess" of where the central bank is heading if the economy continues in its current direction.

Other Fed officials have supported the view.

After lifting rates by 5 percentage points since March 2022, the Fed this month took a breather to assess the effects of its actions.

Higher interest rates mean higher borrowing costs for businesses and consumers, and investors have been worried that an extended tightening cycle could push the U.S. economy into recession. Other central banks, including the Bank of England this week, have hiked rates amid worries about global inflation.

Some strategists are betting that U.S. earnings will hold up as long as employment does.

Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., May 30, 2023. REUTERS/Brendan McDermid

"If you have full employment, that means the consumer, while they may shift their attitudes and pull back in certain areas, are still going to be participants in the economy," said Oliver Pursche, senior vice president and advisor for Wealthspire Advisors in Westport, Connecticut.

"As long as that holds true, corporate earnings are going to generally hold up better than bears and pessimists expect," he said.

"Is it going to be particularly strong? No. But that expectations are so low, I would say the surprise is more likely on the upside than the downside."

Walmart Inc in May raised its annual sales and profit targets thanks to resilient consumer spending.

But other recent U.S. company outlooks suggest at least some pockets of problems.

Package delivery firm FedEx this week posted disappointing quarterly earnings and said waning global demand is pressuring its profit margins.

Also, Olive Garden parent Darden Restaurants delivered a disappointing annual profit outlook.

Morgan Stanley this week said it expects margin pressures due to an inventory glut for Nike, which is due to report quarterly results June 29.

"The market has been too hopeful the Fed can tame inflation, avoid a recession, and cut interest rates," Nick Raich, CEO of The Earnings Scout, an independent research firm, wrote in a note this week. "S&P 500 EPS estimates and stock prices will need to reset lower."

The S&P 500 is down about 1% this week, but remains up more than 13% for the year to date.

(Reporting by Caroline Valetkevitch; Editing by Alden Bentley and Nick Zieminski)

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