Earnings Recession Signals Turbulent Drivers of Economic Engine

Barry Adams
27 Feb, 2023
New York City

Market indexes pared back early gains and investors renewed focus on economic growth on the first day of trading this week after the worst week in 2023. 

Treasury yields were in focus and yields on 2-year and 10-year notes edged lower but the yields on 6-month and one-year Treasury bills traded above 5% for the second week in a row. 

Market sentiment vacillated between rate-path worries and strength of the economy in the face of rates above 5% and mortgage rates above 6.5%. 

But corporate results are signaling that earnings recession may have already begun for more companies in the face higher input and operating costs. 

So far, companies have been reporting a sharp decline in quarterly and annual earnings following a surge in 2021 because companies are struggling to pass higher costs to customers and are facing rising costs and wage pressures. 

Earnings are expected to remain depressed for the rest of the year as companies adjust to higher operating costs and lower revenue growth in the face of higher interest rates and stable consumer spending. 

Retailers are still struggling with high levels of inventories and tough comparisons with previous years and consumers shift focus to experiences from goods.  

This week more than 600 companies are scheduled to report earnings, including results from Zoom Video, Advance Auto Parts, AutoZone, HP Inc, Abercrombie & Fitch, American Eagle Outfitters, Dollar Tree, Kohl's, Lowe's. Best Buy and Big Lots. 

Moreover, investors reacted positively to the fall in durable goods orders supporting the case that the economy is not overheating and pending home sales expanded for the second month in a row. 

Durable goods orders declined in January and pending home sales improved for the second month in a row. 

Investors bid up stocks and look ahead to earnings from retailers as the earnings season slows down. 

 

Pending Home Sales Index Improved In January 

Pending home sales, an index of forward looking home sales, increased for the second month in a row, the National Association of Realtors. 

Pending home sales increased 8.1% In January from the previous month, following a downwardly revised 1.5% gain in December. 

Despite the back-to-back monthly improvement, the home sale index showed home sales activities dropped 24.1% from a year ago.  

“Buyers responded to better affordability from falling mortgage rates in December and January,” said NAR Chief Economist Lawrence Yun.

The Northeast home sales index rose 6.0% from last month to 68.7, a fall of 19.8% from January 2022. 

The Midwest index increased 7.9% to 83.3 in January, a sharp drop of 21.1% from one year ago.  

The South index increased 8.3% to 99.2 in January, dipping 24.7% from the prior year. The West index jumped 10.1% in January to 66.2 but fell 29.3% from a year ago.

“An extra bump occurred in the West region because of lower home prices, while gains in the South were due to stronger job growth in that region,” Yun added.

“Home sales activity looks to be bottoming out in the first quarter of this year, before incremental improvements will occur,” Yun said. 

 

Durable Goods Orders Dropped In January 

Durable goods orders declined in January 4.5% from the previous month, according to the latest data released by the U.S. Census Bureau. 

December durable goods orders were downwardly revised to an increase of 5.1% on the 13.3% plunge in transportation orders. 

Shipments of manufactured durable goods in January decreased 0.1%, down following sixteen consecutive monthly  increases. This followed a 0.4% increase in  December. 

Transportation equipment fell 1.7%, down following ten consecutive monthly increases.  

 

Market Indexes and Yields 

The S&P 500 index increased 0.3% to 3,982.24 and the Nasdaq Composite index advanced 0.6% to 11,466.98.

The yield on 2-year Treasury notes inched lower to 4.78%, 10-year Treasury notes eased to 3.92% and 30-year Treasury bonds hovered near 3.93%. 

Crude oil prices declined 56 cents to $75.75 a barrel and natural gas prices inched up 16 cents to $2.71 a thermal unit. 

  

U.S. Movers 

Berkshire Hathaway declined 0.6% to $458,543.40 after the conglomerate of businesses reported a decline in operating earnings but the company stepped up its stock repurchases. 

Berkshire Hathaway said operating earnings in the fourth quarter declined 8% to $6.7 billion from $7.3 billion and net income attributable to shareholders fell to $18.2 billion from $39.6 billion a year ago. Diluted earnings per Class A Share fell to $12,412 from $26,690 and Class B Share dropped to $8.27 from $17.79 in the previous year.   

In 2022, operating earnings rose to $30.8 billion from $27.4 billion a year ago and net earnings attributable to shareholders swung to ($22.8 billion) from $89.8 billion and diluted earnings per Class A Shares to ($15,539) from $59,460 in the previous year.  

Berkshire repurchased $2.6 billion of its own shares during the fourth quarter bringing the total for  the year to approximately $7.9 billion.

Zoom Video Communications Inc soared 7.7% to $79.40 in the afterhours trading after the company reported better-than-expected earnings. 

Zoom said revenue in the fourth quarter increased 4% to $1.1 billion and the company swung to a net loss of $104.4 million from a profit of $490.5 million. 

The earnings per share was ($0.36) compared to $1.60 a year ago. 

Revenue in the fiscal year ending in January increased 7.0% to $4.4 billion and net income dropped to $103.7 million from $1.4 billion and diluted earnings per share dropped to 34 cents from $4.50 a year ago. 

The company guided fiscal first quarter revenue between $1.080 and $1.085 billion and adjusted-diluted earnings per share between 96 cents and 98 cents per share. 

 

European Markets Advanced Following Earnings Optimism 

European markets traded higher after a week of losses and looked ahead to a busy week of earnings. 

Market sentiment was positive after indexes dropped the most in the previous week in 2023 on the hopes that the Euro Area economy will avoid a recession. 

Investors also noticed that large corporations are reporting better earnings than their competitors in Asia and the United States, despite higher energy costs. 

In economic news, lending growth in the euro zone declined in January and confidence index fell marginally in the currency block but lending growth continued to decelerate following tighter monetary policy. 

 

Euro Area Economic Confidence Index Fell Marginally

The economic confidence index in the Euro Area unexpectedly declined in January, a survey from the Economic Commission showed Monday. 

The confidence index decreased to 99.7 in January from 99.8 in December, a decline for the first time in three months. 

The confidence index monitoring expectations among manufacturers declined 0.5 in February from 1.2 in January and among service providers eased to 9.5 from 10.4 in the corresponding period. 

Despite the looming worries of consumer spending, the confidence index among retailers improved to -0.1 in February from -0.7 in January and among construction managers improved to 1.8 from 1.4 in the corresponding period.  

 

Euro Area Credit Growth Slowed In January 

The annual rate of growth in credit to the private sector declined in January, reflecting the ongoing monetary policy tightening. 

The credit growth slowed to 3.8% in December from 4.3% in January, the European Central Bank reported Monday. 

Annual growth rate of broad monetary aggregate M3 decreased to 3.5% in January 2023 from 4.1% in December and narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, decreased to -0.7% in January from 0.6% in December, the central bank noted. 

The European Central Bank has lifted its key lending rate by 300 basis points since July to tame inflation by gradually lifting rates to restrictive rates and curtailing economic activities. 

Annual growth rate of adjusted loans to households decreased to 3.6% in January from 3.8% in December and adjusted loans to non-financial corporations decreased to 6.1% in January from 6.3% in December. 

M3 money supply growth has been slowing from the recent peak in September last year and lending growth to businesses or corporations slowed for the third month in a row. 

 

Market Indexes and Yields 

The DAX index increased 1.1% to 15,381.43, the CAC-40 index advanced 1.5% to 7,295.55 and the FTSE 100 index added 0.7% to 7,935.11. 

The yield on 10-year German Bunds inched higher to 2.58%, on French bonds edged up to 3.05%, UK gilts to 3.80% and Italian bonds to 4.42%. 

The euro edged up to $1.060, the British pound increased to $1.205 and the Swiss franc edged higher to 93.61 cents.  

Brent crude oil fell 86 cents to $82.69 a barrel and the Dutch TTF natural gas spot price fell Є3.71 to Є47.30 per MWh. 

 

Europe Stock Movers 

Airbus SE increased 1.4% to €123.64 after the aviation group lifted its estimate of future demand for aircrafts in the next two decades on higher expectations of air travel and freight demand in the Pacific region. 

Thales SA increased 0.5% to €133.75 after the French defense company said it plans to hire 12,000 new employees in 2023 to support its expected business growth. 

The aerospace and cyber security company said it plans to add 5,500 new employees in France, 1,050 in the United Kingdom, 600 in Australia, 550 in India and 540 in the United States

Associated British Foods Plc increased 2.2% to 1,989.80 pence after the UK-based diversified conglomerate reported first-half revenue to increase 20% at actual exchange rates and 16% in constant currency. 

Primark sales are expected to rise 19% to £4.2 billion and adjusted operating profit margin is expected to be above 8%. 

The company also lifted its annual outlook and said adjusted operating profit and adjusted earnings per share are "expected to be inline with previous financial year."   

Bunzl Plc increased 2.4% to 3,085.0 pence after the company reported an increase in pre-tax profit. 

In 2022, revenue increased 17.1% to £12.03 billion and adjusted pre-tax increased 17.2% to £818.0 million from £698.2 million a year ago. 

The maker of cigarette filters and tissue paper and outsourcing company increased its divided 10% to 141.7 pence from 132.7 pence in 2021.