Pedestrians with Nike and Allbirds shopping bags in the SoHo district of New York on October 24, 2021.
Nina Westervelt | Bloomberg | Getty Images
It's a change from recent years, when consumers were spending at breakneck speeds – and at high prices – and driving corporate sales to new records. But with weakening demand, more price-sensitive consumers, easing inflation and better supply, some sectors are now forced to deliver earnings growth without the tailwind of price increases.
The answer across industries has been to cut costs, whether through layoffs or acquisitions or simply through greater efficiency. Executives have spent the last few weeks selling these cost-cutting plans to Wall Street.
Nike cut its annual sales growth forecast last week and announced plans to cut costs by $2 billion over the next three years. Companies like Spirit Airlines, hit by a decline in domestic bookings and higher costs, offered buyouts to employees, while toy maker Hasbro announced layoffs of 1,100 employees as it struggles with weak toy sales.
“I think companies are better at controlling costs than maintaining pricing power,” said David Kelly, chief global strategist at JP Morgan Asset Management.
“In the merchandise sector, the pricing power no longer has the same as in the pandemic, some also in the hotel and travel sectors [industries] “They don’t have the pricing power that they had immediately post-Covid,” he added.
Sales growth for companies in the S&P 500 is expected to average 2.7% this year, according to analyst estimates published by FactSet in mid-December. That's down from the average year-over-year growth of 11% in 2022. Meanwhile, net margins are forecast to decline only slightly year-over-year from 11.9% to 11.6%, according to FactSet.
“Companies are very concerned about maintaining their margins,” Kelly said.
FedEx, for example, maintained its adjusted profit forecast for the fiscal year ending May 31 despite its weaker sales forecast. The company announced cost-cutting measures last year.
Consumer spending remained broadly stable, but growth is slowing.
The Mastercard SpendingPulse survey found that holiday retail spending, which excludes auto sales and travel spending, increased by 3.1 from Nov. 1 to Dec. 24 this year over the same period in 2022 when consumer retail spending rose year-over-year % rose 7.6%. These numbers are not adjusted for inflation.
The resistance is not equally noticeable in all sectors.
According to the Mastercard survey, restaurant spending increased 7.8% during the holidays, outpacing overall gains. Starbucks executives, for example, say sales are still strong and customers are opting for more expensive drinks, boosting sales and profits.
According to the survey, consumer spending on clothing and food rose 2.4% and 2.1%, respectively, compared to the same period last year. However, jewelry spending fell 2.4% and electronics spending fell 0.4%, according to the report.
Airline executives touted robust demand over the summer as travel rebounded from pandemic shutdowns, but fares have fallen starting in 2022, when capacity was constrained by staff shortages and plane delays. The U.S. Labor Department's latest inflation report showed airfares fell 12% in November compared to a year ago.
Travelers walk with their luggage at John F. Kennedy International Airport in New York on December 23, 2023.
Jeenah Moon | Getty Images
Southwest Airlines CEO Bob Jordan told CNBC on the sidelines of an industry event in New York earlier this month that despite some off-peak discounts, the airline's fares were still higher than last year. The airline has cut its capacity growth plans for 2024 and plans to deploy aircraft more during times of higher demand.
“Next year’s capacity changes are all about optimizing the network to meet new demand patterns,” Jordan said. “In some cases there are ups and downs [of demand] are further apart.
Automakers are also losing pricing power after years of robust demand and low supply of new vehicles that have led to record profits in North America for Detroit automakers as well as foreign-based companies such as Toyota Motor.
Average transaction prices for new vehicles rose from less than $38,000 in January 2020 to over $50,000 in early 2023 – an unprecedented 32% increase over that period. Prices remain high, but fell more than 3.5% through October to about $47,936, according to the latest data from Cox Automotive.
“The consumer is definitely fighting back,” said Ohsung Kwon, equity strategist at Bank of America, pointing to some prices.
“But we believe the consumer is healthy,” he continued. “The consumer balance sheet still looks phenomenal.”
There's plenty to be excited about about the state of U.S. consumers – the job market is still strong, unemployment is low and spending is stable.
But consumers have also dipped into their savings and racked up credit card debt, with balances reaching a record $1.08 trillion at the end of the third quarter, according to the New York Federal Reserve. Credit card default rates are above pre-pandemic levels.
This dynamic is causing some consumers to pull back on spending at a time when businesses were already struggling to shift spending as pandemic fears eased. Consumers who had spent heavily on things like home improvement during the coronavirus lockdowns shifted their money to services like travel and dining after restrictions were lifted.
While airlines, many retailers and others have forecast a strong holiday season, the question remains whether consumers will maintain their spending patterns in the coming months, which are typically an off-season for shopping and travel, especially as they pay off their final purchases. That could mean a difficult time for companies to force price increases on consumers.
Even though companies are unable to raise prices and sales growth is muted, analysts are still optimistic about next year's earnings.
FactSet data shows analysts expect S&P 500 companies' first-quarter 2024 earnings to rise 6.6% year-over-year. They forecast a sales increase of 4.4%. Both growth metrics would represent year-over-year and quarter-over-quarter improvement. Net margins are expected to increase 11.8%.
Bank of America's Kwon said he expects earnings to improve even as U.S. economic growth slows in part because of the company's strategy changes.
“Companies are really focused on what they can save,” he said. “Companies have been hiring too much and building up capacity. They stopped that.”
— CNBC's Michael Wayland contributed to this article.
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