New York CNN —
There is a season for everything and now is the time to earn.
For the past few weeks, investors have focused solely on inflation and Fed policy, but now market reactions are getting bigger on gains (especially misses) and smaller on economic data.
What’s up: “We expect earnings to be the focus going forward,” Bank of America strategists Savita Subramanian and Ohsung Kwon wrote in a note on Friday. They noted that the S&P 500’s reactions to gains and failures have skyrocketed over the past three quarters, and have now surpassed the one-day market reaction to both CPI inflation and Fed policy meeting decisions.
Companies that missed both revenue and earnings per share in the most recent quarter underperformed the S&P 500 by an average of nearly six percentage points the next day, the biggest reaction to earnings losses on record.
Disney shares fell 13.16% last November — the lowest in more than two years — as it missed earnings estimates. Meta shares plunged 24% after posting a third-quarter revenue decline in October, the company’s second straight quarterly revenue decline. And shares of Palantir closed more than 11% in November after just slightly missing estimates.
“We see this as a narrative shift in the market from the Fed and inflation to earnings: reactions to earnings have increased while reactions to inflation data have increased and FOMC meetings got smaller,” Subramanian and Kwon wrote.
So we can expect some serious volatility over the next few weeks as companies announce their fourth quarter earnings results.
Bank of America’s predictive analytics team analyzed earnings logs to calculate sentiment scores and found that corporate sentiment remained unchanged well below its highs in the third quarter, suggesting a potential earnings decline.
Likewise companies Evidence of improving business conditions (specific use of the words “better” or “stronger” versus “worse” or “weaker”) remained well below historical averages, and expressions of optimism fell to their lowest levels since the first quarter of 2020.
So far, the fluctuations have been to the downside. S&P 500 earnings estimates for the fourth quarter are down about 7% since October. Early earnings reports from some of the largest financial institutions point to a dismal quarter.
Bad news ahead: The estimated earnings decline for the S&P 500 in the fourth quarter of 2022 is -3.9%, according to a FactSet analysis. If that’s really the case fall, this will be the first earnings decline reported by the index since the third quarter of 2020.
In recent weeks, FactSet reported, earnings expectations for the first and second quarters of 2023 have shifted from year-on-year growth to a year-on-year decline.
The newest: JPMorgan beat estimates for fourth-quarter revenue, but also increased the amount of money for expected credit losses. The bank added a $2.3 billion provision for credit losses in the quarter, a 49% increase from the third quarter.
The move was fueled by a “slight deterioration in the company’s macroeconomic outlook, which now reflects a mild recession in the central case,” the report said. On a subsequent call, JPMorgan chief financial officer Jeremy Barnum told reporters that the bank expects a recession by the fourth quarter of 2023.
Bank of America (BAC) also topped gains Expectations, but CEO Brian Moynihan said Friday the bank was bracing for rising unemployment and a recession in 2023. “Our baseline scenario is a mild recession,” he said. The bank added a $1.1 billion provision for loan losses, a notable change from last year when that number was negative.
What’s next: Hold onto your hats. Twenty-six S&P 500 companies are scheduled to report their fourth-quarter results next week.
Apple CEO Tim Cook has responded to angry shareholders by recommending the company cut his salary this year, my colleague Anna Cooban reports.
Cook received $99.4 million in total compensation last year. The vast majority of his 2022 compensation — about 75% — was tied into company stock, with half of that tied to share price performance.
But shareholders voted against Cook’s pay package after Apple stock fell nearly 27% over the past year. The vote isn’t binding, but the board’s compensation committee said Cook himself requested the reduction.
“The Compensation Committee has reconciled shareholder feedback, Apple’s exceptional performance and a recommendation from Mr. Cook to adjust his compensation in light of the feedback received,” the company said in its annual proxy statement released Thursday.
But don’t cry for Tim Cook just yet. This year, the target for the executive’s stock award is $40 million. About $30 million, or three-quarters of that, is linked to stock price performance. The tech boss, who has headed Apple (AAPL) since 2011, is estimated to have personal wealth of $1.7 billion, according to Forbes.
The bottom line: Apple’s share price, along with other tech companies, has plummeted over the past year as some of its factories in China shut down due to coronavirus lockdowns. Supply chain bottlenecks and fears that a global economic slowdown would hurt demand also dragged the stock lower.
Angry investors believe that the person at the helm of the company should be paid less too.