The market is too optimistic about corporate profits by 2023. Here’s why.

After several attempts this month, the S&P 500 SPX,
it has finally managed to close above the 4,000 level. Happy Thanksgiving Day! Bulls will now want to see that barrier turn into support and will keep an eye on the next hurdle, the 200-day moving average, currently around 4,062.

But for the market to extend its rally into next year, one of two things will probably have to happen. Corporate earnings will have to increase or the multiple applied to earnings will have to increase. The latter can happen if investors turn more bullish, for example, in anticipation of a Fed turnaround.

However, anyone expecting earnings growth, even managing to be flat by 2023, “is very naive,” according to Peter Ganry, head of equity strategy at Saxo Bank.

Ganry notes that the 12-month earnings per share estimate on the S&P 500 is currently $235.34, 7% above the expected full-year 2022 EPS of $219.38. That’s too high, he acknowledges her.

“There is nothing unusual about this divergence that conflicts with reality, as sell-side analysts have a natural long bias…and are slow to react and incorporate new information. The fact that the S&P 500 12-month EPS estimate is only 4% of its recent high despite ongoing margin compression speaks volumes.”

And indeed, it is over-optimism in corporate margins that may trip investors. It is important. As the graph below shows, over a short period of time, such as a year, changes in earnings are strongly associated with changes in operating margin.

Source: Saxo Bank.

“If you take EPS of $220 next year and split it with expected earnings per share of about $1,800, which fits pretty well with a 1-year lag in US nominal GDP growth. the last 12 months it was in September,” says Ganry.

That means companies in the S&P 500 can maintain their net profit margin next year. That is “a completely independent assumption” for several reasons.

First of all, companies have been constantly talking about margin pressures in their third quarter earnings reports, particularly as it relates to wage pressures and also raw material and energy costs. In fact, wage growth (generally the biggest cost for many companies) in the US and Europe is running at its fastest pace in many decades.

“High wage growth is difficult to offset in an inflationary environment when recent price increases by companies have now reached a point where they are destructive to volume growth (Home Depot is a recent example of this) Ganry notes.

Next: “Operating and net profit margin are coming off historically high levels and margins are mean reverting, so this alone indicates that margins will trend downward from current levels” .

Adds Ganry: “The fact that the third-quarter net profit margin on the S&P 500 is 11.9% (below the final 12-month figure) and trending lower suggests that margins are falling.” faster than expected.”

Source: Saxo Bank.

Another downside risk to earnings per share in 2023 is that revenue growth could be lower than current estimates, as nominal GDP growth will slow to 6.7% annualized in the third quarter, below the annualized average of 12.2% in 2021.

Finally, the move up in interest rates as the Fed continues to fight inflation will cause corporate financing costs to rise. “Not much because only 20% of the outstanding debt will be refinanced over the next 12 months, but it will still be left from operating income before we hit EPS, which will affect net profit margin.”

“If we are correct about our 2023 operating margin call, then the impact on the S&P 500 will vary based on equity risk premium (P/E ratio), revenue growth, and net profit margin. real,” says Ganry. The S&P 500 is sensitive to these variables.


The markets are entering the holidays on a subdued note. S&P 500 futures ES00,
are slightly, with benchmark 10-year Treasury yields TMUBMUSD10Y,
it barely changed at 3.754%. Oil CL.1,
However, it is coming under pressure again on concerns about weak demand from China as Beijing implements more COVID-19 lockdowns.

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The buzz

Credit Suisse CSGN Shares,
fell 5% to stay near record lows after the embattled Swiss bank delivered the latest in a long line of miserable trading upgrades.

Shares in Apple AAPL,
are a fraction softer in pre-market trading as news emerges that Workers at China’s largest iPhone factory were beaten and detained.

A surprise quarterly loss revealed after the closing bell on Wednesday has hit shares of Nordstrom JWN,
dropped almost 10%.

With the markets closed on Thursday for Thanksgiving and everyone seemingly going shopping on Friday, it looks like all the economic data for the week has piled up on Wednesday. So, taking a deep breath… here goes…

At 8:30am ET, we have the initial weekly jobless claims along with the durable goods orders for October. At 9:45 am the S&P US PMI Manufacturing and Services PMI data for November arrives. Then, at 10 am, the October New Home Sales report is released along with the November University of Michigan Consumer Confidence Index and 5-Year Inflation Expectations. Finally, at 2:00 p.m. the minutes of the recent Federal Reserve interest rate setting meeting will be published.

off ronaldo and now the Glazers could also leave Manchester United. The American owners of the English Premier League soccer giants, who also own the Tampa Bay Buccaneers, say they are exploring options that may include selling the club. United MANU actions,
it jumped 15% late on Tuesday and is adding another 11% in pre-market action on Wednesday.

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The graphic

Consider this from Bespoke Investment if you’re coming back from Thanksgiving and fancy trading in the New Year.

“The S&P 500 has rallied from the close on the Wednesday before Thanksgiving through the end of the year about three-quarters of the time with an average gain of 1.93%. However, where momentum has been dragging the index lower to date, the performance for the rest of the year has been less positive. Again, looking at years where the index has fallen by at least 10% before Thanksgiving week, as is the case this year, positive returns through the end of the year have been less common and have only occurred half the time with an average drop of 0.1%. says Bespoke.

Source: Bespoke Investment.

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