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Economic Slowdown Concerns Reflected in S&P 500 Earnings Calls

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by Sakthi Prasad , Director - Content
21 March 2023

snp global companies hint recession

Amid concerns of an economic slowdown or recession, more S&P 500 companies have mentioned the term "recession" during their fourth-quarter earnings conference calls when compared to historical Q4 average, according to recent data published by market data provider FactSet.

Companies that form part of the S&P 500 index play a crucial role in the U.S. and global economies, representing diverse industries. They drive economic growth, job creation, and serve as an economic barometer. Their performance impacts global markets, investor sentiment, and policy decisions, making them essential to understanding and forecasting economic trends.

FactSet Document Search revealed that 148 companies cited the term, well above the 5-year average of 71 and the 10-year average of 57. Notably, the Financials and Industrials sectors saw the highest number of S&P 500 companies mentioning "recession" in their Q4 earnings calls.

However, the number of S&P 500 companies mentioning "recession" during their Q4 earnings calls has actually declined for two consecutive quarters. The Q4 2022 figure of 148 companies is 20% lower than Q3 2022 (185) and 39% lower than Q2 2022 (241).

Despite the decline in the number of companies citing "recession" in their earnings calls, estimated earnings declines for Q1 2023 (6.1%) and Q2 2023 (3.9%) have increased since December 31, indicating a more pessimistic outlook.

As a result, the S&P 500 index is expected to report its largest year-over-year decline in earnings since Q2 2020. Analysts have lowered earnings estimates for Q1 2023 by a larger margin than average, with a decrease of 5.7% since December 31. This figure is larger than the 5-year average of 2.8% and the 10-year average of 3.3%.

Regarding guidance, more S&P 500 companies have issued negative EPS guidance for Q1 2023 compared to recent averages. At this point in time, of the 108 companies that have issued EPS guidance for Q1 2023, 83 have issued negative EPS guidance, and 25 have issued positive EPS guidance. The number of companies issuing negative EPS guidance is above the 5-year average of 57 and the 10-year average of 65.

For Q1 2023, the S&P 500 is expected to report a year-over-year earnings decline of 6.1%, compared to the estimated decline of 0.4% on December 31. This decline would mark the largest earnings decline since Q2 2020 (31.8%) and the second consecutive quarter of decreased earnings. Of the eleven sectors, five are projected to report year-over-year earnings growth, while six are expected to report a year-over-year decline.

Analysts have also lowered revenue estimates during the quarter, with the S&P 500 now expected to report year-over-year revenue growth of 2.0%, compared to the estimated growth rate of 3.4% on December 31. If this figure holds, it will be the lowest revenue growth rate since Q3 2020 (-1.1%).

For the first half of 2023, analysts expect earnings decline, but they predict earnings growth for the second half of the year. The forward 12-month P/E ratio is 17.2, below the 5-year average (18.5) and the 10-year average (17.3). However, it is above the forward P/E ratio of 16.7 recorded at the end of the fourth quarter.

The estimated net profit margin for the S&P 500 in Q1 2023 is 11.3%, equal to the previous quarter's margin but below the 5-year average of 11.4% and the year-ago margin of 12.3%.

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